Question

Polaski Company manufactures and sells a single product called a Ret. Operating at capacity, the company can produce and sell 54,000 Rets per year. Costs associated with this level of production and sales are as follows:

  

	Unit			Total
Direct materials	$	24.00		$	1,296,000
Direct labour		17.00			918,000
Variable manufacturing overhead		12.00			648,000
Fixed manufacturing overhead		18.00			972,000
Variable selling expense		4.00			216,000
Fixed selling expense		6.00			324,000
Total cost	$	81.00		$	4,374,000

  

The Rets normally sell for $86 each. Fixed manufacturing overhead is constant at $972,000 per year within the range of 31,000 through 54,000 Rets per year. 1)Assume that Polaski Company expects to sell only 54,000 Rets through regular channels next year. The Canadian Forces would like to make a one-time-only purchase of 23,000 Rets. The Forces would pay a fixed fee of $3.30 per Ret, and in addition it would reimburse Polaski Company for all costs of production (variable and fixed) associated with the units. Thus, accepting the Canadian Forces’ order would require giving up regular sales of 23,000 Rets. If the Forces’ order is accepted, by how much will profits be increased or decreased from what they would be if the 23,000 Rets were sold through regular channels?

Answer 1