Question

Polaski Company manufactures and sells a single product called a Ret. Operating at capacity, the company can produce and sell 38,000 Rets per year. Costs associated with this level of production and sales are given below:

	Unit			Total
Direct materials	$	20		$	760,000
Direct labor		8			304,000
Variable manufacturing overhead		3			114,000
Fixed manufacturing overhead		7			266,000
Variable selling expense		4			152,000
Fixed selling expense		6			228,000
Total cost	$	48		$	1,824,000

The Rets normally sell for $53 each. Fixed manufacturing overhead is constant at $266,000 per year within the range of 30,000 through 38,000 Rets per year.

Required:

Part 1. Assume that due to a recession, Polaski Company expects to sell only 30,000 Rets through regular channels next year. A large retail chain has offered to purchase 8,000 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 8,000 units. This machine would cost $16,000. 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 ____________ by ____________

Part 2. Refer to the original data. Assume again that Polaski Company expects to sell only 30,000 Rets through regular channels next year. The U.S. Army would like to make a one-time-only purchase of 8,000 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?

Net Profit ____________ by ______________

Part 3. Assume the same situation as that described in (2) above, except that the company expects to sell 38,000 Rets through regular channels next year. Thus, accepting the U.S. Army’s order would require giving up regular sales of 8,000 Rets. If the Army’s order is accepted, by how much will profits increase or decrease from what they would be if the 8,000 Rets were sold through regular channels?

Net Profit _____________ by ___________

Answer 1

Part 1

Net Profit _increase_____ by __ 84,160

Working :-

	Total for 30000			Total for 8000
Direct materials	30000	600,000		8000	160,000
Direct labor	30000	240,000		8000	64,000
Variable manufacturing overhead	30000	90,000		8000	24,000
Fixed manufacturing overhead	Fixed from 30000 to 38000 units	266,000		Special Machine	16,000
Variable selling expense	30000	120,000		8000	8,000
Fixed selling expense	Assuming this is already incurred and fixed	228,000
Total cost	$	1,544,000		$	272,000
Sale	53*30000	1590000		(53*84%)*8000	356160
Net Profit	Sale - Cost	46,000			84,160

Part2

Net Profit _increase___ by ____9600_

Working :-

	Total for 30000			Total for 8000
Direct materials	30000	600,000		Reimbursed	0
Direct labor	30000	240,000		Reimbursed	0
Variable manufacturing overhead	30000	90,000		Reimbursed	0
Fixed manufacturing overhead	Fixed from 30000 to 38000 units	266,000
Variable selling expense	30000	120,000		Reimbursed	0
Fixed selling expense	Assuming this is already incurred and fixed	228,000
Total cost	$	1,544,000		$	0
Sale	53*30000	1590000		1.2*8000	9600
Net Profit	Sale - Cost	46,000			9,600

Part3

Net Profit _decrease___ by ____134400_

Working :-

Selling 38000 units in normal business			Accepting the Army order
	Total for 38000		Total for 30000		Total for 8000
Direct materials	$	760,000	30000	600,000	Reimbursed	0
Direct labor		304,000	30000	240,000	Reimbursed	0
Variable manufacturing overhead		114,000	30000	90,000	Reimbursed	0
Fixed manufacturing overhead		266,000	Fixed from 30000 to 38000 units	266,000
Variable selling expense		152,000	30000	120,000	Reimbursed	0
Fixed selling expense		228,000	Assuming this is already incurred and fixed	228,000
Total cost	$	1,824,000	$	1,544,000	$	0
Sale	53	2014000	53	1590000	1.2	9600
Net Profit	Sale - Cost	190,000		46,000		9,600
Loss due to this contract							190000-46000-9600=	134,400