Question

Polaski Company manufactures and sells a single product called a Ret. Operating at capacity, the company can produce and sell 52,000 Rets per year. Costs associated with this level of production and sales are as follows:

  

	Unit			Total
Direct materials	$	23.50		$	1,222,000
Direct labour		16.50			858,000
Variable manufacturing overhead		11.50			598,000
Fixed manufacturing overhead		17.50			910,000
Variable selling expense		4.00			208,000
Fixed selling expense		6.00			312,000
Total cost	$	79.00		$	4,108,000

  

The Rets normally sell for $84 each. Fixed manufacturing overhead is constant at $910,000 per year within the range of 30,000 through 52,000 Rets per year.

  

Required:

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 22,000 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 22,000 units. This machine would cost $44,000. Polaski Company has no assurance that the retail chain will purchase additional units any time in the future. Determine the impact on profits next year if this special order is accepted. ________in profits ______

      

2.

Refer to the original data. Assume again that Polaski Company expects to sell only 30,000 Rets through regular channels next year. The Canadian Forces would like to make a one-time-only purchase of 22,000 Rets. The Forces would pay a fixed fee of $3.10 per Ret, and in addition it would reimburse Polaski Company for all costs of production (variable and fixed) associated with the units. Since the Forces would pick up the Rets with its own trucks, there would be no variable selling expenses of any type associated with this order. If Polaski Company accepts this order, by how much will profits be increased or decreased for the year? ________in profits ______

  

      

3.

Assume that Polaski Company expects to sell only 52,000 Rets through regular channels next year. The Canadian Forces would like to make a one-time-only purchase of 22,000 Rets. The Forces would pay a fixed fee of $3.10 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 22,000 Rets. If the Forces’ order is accepted, by how much will profits be increased or decreased from what they would be if the 22,000 Rets were sold through regular channels? ________in profits ______

  

      

Answer 1

Total Capacity Current Operating Level Special Order Selling Price Direct Material 52000 30000 22000 84 23.50 Direct labor 16.50 Variable Manufacturing overheads Fixed Manufacturing Overheads Variable Selling Expenses Fixed Selling Expenses 11.50 17.50 4.00 6.00 Total Cost 79 Answers 353320 Increase 1) Financila Advantage (Net increase) 453200 Increase 2) Financial Advantage (Net increase) 173800 Decrease 3) Financial Disadvantage (Net Decrease)

1) if Accept the retail Chain Offer at 16% Discount Price. For 22000 rets Per unit 22000 Units Sales Revenue Direct Material Direct labor Variable Manufacturing overheads Variable Selling Expenses Special Machine Net Operating income From Order 70.56 1552320 23.50 517000 16.50 363000 253000 11.50 1.00 22000 44000 353320 353320 Net profit Increase By 2)IF Accept the US Army Order for Fixed fee of $3.10, and all Manufactruing Cost will Reimburse Per unit 22000 Units Fixed Fee Received Reimberse the Fixed MOH Incremental Net profit 3.10 68200 17.50 385000 453200 Net profit Increase By 453200

3) IF US Army order Accepted but Operating at full capacity. At Current operating Levele 30000 Units Full Capacity 52000 Sales Revnue Direct Material Direct labor Variable Manufacturing overheads Fixed Manufacturing Overheads Variable Selling Expenses Fixed Selling Expenses Total Cost Net Profit 2520000 4368000 1222000 858000 705000 495000 598000 345000 910000 910000 208000 120000 312000 312000 4108000 2887000 260000 367000 Increemtnal Analysis Increse in Net profit by Order Lose in profit for the Special Oder = -367000-260000 Decrease in net Profit 453200 -627000 -173800 Net Profit Will Decrase by 173800