Question

In: Accounting

Polaski Company manufactures and sells a single product called a Ret. Operating at capacity, the company...

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:
Unit Total
  Direct materials $ 20 $ 680,000
  Direct labor 10 340,000
  Variable manufacturing overhead 3 102,000
  Fixed manufacturing overhead 7 238,000
  Variable selling expense 4 136,000
  Fixed selling expense 6 204,000
Total cost $ 50 $ 1,700,000
The Rets normally sell for $55 each. Fixed manufacturing overhead is constant at $238,000 per year within the range of 25,000 through 34,000 Rets per year.
Required:
1.

Assume that due to a recession, Polaski Company expects to sell only 25,000 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.

Net Profit (increases/decreases) by

2.

Refer to the original data. Assume again that Polaski Company expects to sell only 25,000 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 $1.80 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?

Net Profit (increases/decreases) by

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 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?

Net Profit (increases/decreases) by

Solutions

Expert Solution

1) New contribution margin
Selling price   55*(1-.16) 46.2
less :Variable expense
Direct materials 20
Direct labor 10
variable manufacturing overhead 3
variable selling expense (4*25%) 1
total variable expense 34 -34
New contribution margin 12.2
total contribution margin 9000*12.20) 109800
less :cost of machine -18,000
Net income 91800
financail advantage 91,800
net profit increase by $91,800
2) Fixed fee 1.8
Fixed manufacturing overhead reimbursed 7
total 8.8
total contribution   9000*8.4 79200
financial advantage 79,200
net profit increases by $79,200
(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   55
less :Variable expense
Direct materials 20
Direct labor 10
variable manufacturing overhead 3
variable selling expense 4
total variable expense 37 -37
New contribution margin 18
contribution lost (9000*18) -162000
income from Army order 79,200
Net loss -82800
Net profit will decrease by 82800
financial disadvantage 82,800 answer

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