Assume that due to a recession, Polaski Company expects to sell only 41,000 Rets
ID: 2593264 • Letter: A
Question
Assume that due to a recession, Polaski Company expects to sell only 41,000 Rets through regular channels next year. A large retail chain has offered to purchase 7,000 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 7,000 units. This machine would cost $14,000. 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 41,000 Rets through regular channels next year. The U.S. Army would like to make a one-time-only purchase of 7,000 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 48,000 Rets through regular channels next year. Thus, accepting the U.S. Army’s order would require giving up regular sales of 7,000 Rets. If the Army’s order is accepted, by how much will profits increase or decrease from what they would be if the 7,000 Rets were sold through regular channels?
Polaski Company manufactures and sells a single product called a Ret. Operating at capacity, the company can produce and sell 48,000 Rets per year. Costs associated with this level of production and sales are given below:Explanation / Answer
Income statement if 48000 Units sold Amount in $ Per Unit Total Sales 48 2304000 less: Cost of goods sold Direct materils 15 720000 Direct Labour 8 384000 variable manufacturing Expenses 3 144000 variable selling Expenses 4 192000 Fixed selling Expenses (48000*$6) 288000 Fixed manufacturing Ove head (48000*$7) 336000 2064000 Operating Profit 240000 Requirement 1 Incremental Profit if Special order accepted (7000) Incremental Sales (7000*$48*(100%-16%) 282240 Less: Variable cost Direct materils (7000*$15) 105000 Direct Labour (7000*$8) 56000 variable manufacturing Expenses (7000*$3) 21000 variable selling Expenses(7000*$4*25%) 7000 Cost of Special machine 14000 203000 Incremental Profit if Special order accepted (7000) 79240 Requirement 2 Incremenatl Income =7000 Units* $1.40 =$9800 Fixed costs reimbusred =Fixed manufacturng + Fixed selling Expenses =($7+$6)*7000 =$91000 Total Incremental income =$9800+$91000 =$100800 No effect of varable expenses . Every variable expenses Incurred and Reimbursed Requirement 3 if the company accets sepcial order , it will lose the reqular income generated from regular channels Profit if 48000 Units sold through regulars channals =48000*$48 -$2064000 =$240,000 if the sepcial order accepted ,then 41000 units regular, 7000 special order Amount in $ Per Unit Total Sales 41000 48 1968000 revenue from 7000 unit (7000 *$1.40) $1.4 9800 1977800 less: Cost of goods sold for 41000 Units Direct materils 15 615000 Direct Labour 8 328000 variable manufacturing Expenses 3 123000 variable selling Expenses 4 164000 less: Cost of goods sold for 7000 Units variable expenses are incurred and Reimbused 0 Fixed Manufacturing & Fixed Selling Expenses recoverd ($7+$6)*7000 =91000 -91000 Fixed selling Expenses (48000*$6) 288000 Fixed manufacturing Ove head (48000*$7) 336000 1763000 Profit for special order 7000 and 39000 regulars channals 214800 Financial Advantage /(Disadvantage) of accepting order Profit if Special order accepted 214800 profit if Not accepted 240000 Financial Advantage /(Disadvantage) of accepting order -25200 1. Net Profit Incresed by $79240 2 Net profit Incresed by $100800 3. net Profit will decresed By ($25200)