Polaski Company manufactures and sells a single product called a Ret. Operating
ID: 2590012 • Letter: P
Question
Polaski Company manufactures and sells a single product called a Ret. Operating at capacity, the company can produce and sell 34,000 Rets per year. Costs associated with this level of production and sales are given below:
Assume that due to a recession, Polaski Company expects to sell only 26,000 Rets through regular channels next year. A large retail chain has offered to purchase 8,000 Rets if Polaski is willing to accept a 16% discount off the regular price. There would be no sales commissions on this order; thus, variable selling expenses would be slashed by 75%. However, Polaski Company would have to purchase a special machine to engrave the retail chain’s name on the 8,000 units. This machine would cost $16,000. Polaski Company has no assurance that the retail chain will purchase additional units in the future. Determine the impact on profits next year if this special order is accepted.
Refer to the original data. Assume again that Polaski Company expects to sell only 26,000 Rets through regular channels next year. The U.S. Army would like to make a one-time-only purchase of 8,000 Rets. The Army would pay a fixed fee of $1.40 per Ret, and it would reimburse Polaski Company for all costs of production (variable and fixed) associated with the units. Because the army would pick up the Rets with its own trucks, there would be no variable selling expenses associated with this order. If Polaski Company accepts the order, by how much will profits increase or decrease for the year?
Assume the same situation as that described in (2) above, except that the company expects to sell 34,000 Rets through regular channels next year. Thus, accepting the U.S. Army’s order would require giving up regular sales of 8,000 Rets. If the Army’s order is accepted, by how much will profits increase or decrease from what they would be if the 8,000 Rets were sold through regular channels?
Unit Total Direct materials $ 20 $ 680,000 Direct labor 8 272,000 Variable manufacturing overhead 3 102,000 Fixed manufacturing overhead 9 306,000 Variable selling expense 2 68,000 Fixed selling expense 6 204,000 Total cost $ 48 $ 1,632,000
Explanation / Answer
1) New contribution margin Selling price 53*(1-.16) 44.52 less :Variable expense Direct materials 20 Direct labor 8 variable manufacturing overhead 3 variable selling expense (2*25%) 0.5 total variable expense 31.5 -31.5 New contribution margin 13.02 total contribution margin (8000*13.02)= 104160 less :cost of machine -16,000 Net income 88160 Net profit increases by 88,160 2) Fixed fee 1.4 Fixed manufacturing overhead reimbursed 9 total 10.4 total contribution 8000*10.40 = 83200 Net profit increase by 83,200 (note though VMOH is also reimbursed ,it is not considered as the same amount will be incurred in production also) 3) original contribution margin per unit Selling price 53 less :Variable expense Direct materials 20 Direct labor 8 variable manufacturing overhead 3 variable selling expense 2 total variable expense 33 -33 New contribution margin 20