Polaski Company manufactures and sells a single product called a Ret. Operating
ID: 2752997 • Letter: P
Question
Polaski Company manufactures and sells a single product called a Ret. Operating at capacity, the company can produce and sell 46,000 Rets per year. Costs associated with this level of production and sales are given below: The Rets normally sell for $53 each. Fixed manufacturing overhead is constant at $414.000 per year within the range of 37,000 through 46,000 Rets per year. Assume that due to a recession, Polaski Company expects to sell only 37,000 Rets through regular channels next year. A large retail chain has offered to purchase 9,000 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 9,000 units. This machine would cost $18,000 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 37,000 Rets through regular channels next year. The U S. Army would like to make a one-time-only purchase of 9,000 Rets The Army would pay a fixed fee of $1.20 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 46,000 Rets through regular channels next year. Thus, accepting the U S. Army's order would require giving up regular sales of 9,000 Rets If the Army's order is accepted, by how much will profits increase or decrease from what they would be if the 9,000 Rets were sold through regular channels?Explanation / Answer
Polaski Company can produce and sell 46,000 Rets per year.
The variable manufacturing cost is $29 (Direct material $20 + Direct labor 6 +overheads 3)
Fixed manufacturing costs of $ 414,000 are constant within the range of 37,000 to 46,000 Rets i.e. even if the company makes 37,000 Rets, it will incur $ 414,000.
Answer 1. Net Profit will increase by $112,680
Explanation -
Polaski can expect to sell only 37,000 Rets next year. If Polaski does not take up the offer of the large retail chain the profits of Polaski from sale of 37,000 Rets will be -
Additional profit when Polaski takes up the order of large retail chain.
9,000 Rets @ 16% discount
Answer 2. Net profit will increase by $ 91,800
Explanation -
When the US army makes a one time purchase of 9,000 Rets
Cost of production fixed + variable ( 20+ 6+ 3+ 9) = $38
Reimbursement of manufacturing costs for 9000 Rets = 38 X 9000 = 342,000
Fixed Fee for 9000 Rets @ $ 1.20 X 9000 = 10,800
Total sale value to the US army = 342,000 +10,800 = 352,800
Variable expense of 9000 Rets $ 29 = 9000 X 29 = 261,000
Fixed expense of producing 9,000 Rets = 0 ( as explained in 1. above)
Profit from selling Rets to the US army = 352,800 - 261,000 = 91,800
3. Net Profit will decrease by $7,200
Explanation
a) Profit when Polaski sells 46,000 Rets through regular channel -
b) Profit when Polaski sells 37,000 through regular channel and 9,000 to the US army-
Difference in a) and b) 230,000 - 222,800 = 7200
Sales $ 44.52 (53 less 16%) X 9000 400,680 Variable manufacturing expense 29 X 9000 261,000 Variable selling expense 1 (25% of $ 4) X 9,000 9,000 Fixed expense (already charged to 37,000 Rets) 0 Cost of special machine ( since no assurance of future orders) 18,000 Additional Profit from 9000 Rets 112,680