Question

Polaski Company manufactures and sells a single product called a Ret. Operating at capacity, the company can produce and sell 44,000 Rets per year. Costs associated with this level of production and sales are given below: Unit Total Direct materials $ 15 $ 660,000 Direct labor 6 264,000 Variable manufacturing overhead 3 132,000 Fixed manufacturing overhead 9 396,000 Variable selling expense 2 88,000 Fixed selling expense 6 264,000 Total cost $ 41 $ 1,804,000 The Rets normally sell for $46 each. Fixed manufacturing overhead is constant at $396,000 per year within the range of 37,000 through 44,000 Rets per year. Required: 1. 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 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. 2. 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 7,000 Rets. The Army would pay a fixed fee of $2.00 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? 3. Assume the same situation as that described in (2) above, except that the company expects to sell 44,000 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?

Answer 1

Ques 1
sell only	37000
offer to purchase	7000
discount	16%
variable selling expenses slashed by	75%
Machine	14000
new selling price	38.64
	Unit	Total
		7000
Sales from the order ($46 × 84%)	$        38.64	$ 270,480.00
Less costs associated with the order:
Direct materials	$        15.00	$ 105,000.00
Direct labor	$          6.00	$    42,000.00
Variable manufacturing overhead	$          3.00	$    21,000.00
Variable selling expense ($2 × 25%)	$          0.50	$      3,500.00
Special machine ($14,000 /7,000 units)	$          2.00	$    14,000.00
Total costs	$        26.50	$ 185,500.00
Net increase in profits	$        12.14	$    84,980.00
Ques 2
sell only	37000
offer to purchase	7000
fixed fee	$          2.00
variable selling expenses slashed by	100%
Sales from the order:
Reimbursement for costs of production (variable production	$   231,000
costs of $24 plus fixed manufacturing overhead cost of
$9 = $33 per unit; $33 per unit × 7,000 units)
Fixed fee ($2.00 per unit × 7,000 units)	$      14,000
Total revenue	$   245,000
Less incremental costs—variable production costs ($24 per unit      × 7,000 units)	$ (168,000)
Net increase in profits	$      77,000
Ques 3
sell only	44000
offer to purchase	7000
Sales:
From the U.S. Army (above)	$   245,000
From regular channels ($46 per unit × 7,000 units)	$   322,000
Net decrease in revenue	$   (77,000)
Less variable selling expenses avoided if the Army’s order	$      14,000
is accepted ($2 per unit × 7,000 units)
Net decrease in profits if the Army’s order is accepted	$   (63,000)