Question

Polaski Company manufactures and sells a single product called a Ret. Operating at capacity, the company can produce and sell 36,000 Rets per year. Costs associated with this level of production and sales are as follows: Direct materials Direct labour Variable manufacturing overhead Fixed manufacturing overhead Variable selling expense Fixed selling expense Unit $19.50 12.50 7.50 13.50 4.00 6.00 Total $ 702,000 450,000 270,000 486,000 144,000 216,000 Total cost $63.00 $2,268,000 The Rets normally sell for $68 each. Fixed manufacturing overhead is constant at $486,000 per year within the range of 22,000 through 36,000 Rets per year. Required: 1. Assume that, due to a recession, Polaski Company expects to sell only 22,000 Rets through regular channels next year. A large retail chain has offered to purchase 14,000 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 14,000 units. This machine would cost $28,000. 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. Answer is not complete. Net increase profits

Answer 1

36000 22000 14000 68 Total Capacity Current Operating Level Special Order Selling Price Direct Material Direct labor Variable Manufacturing overheads Fixed Manufacturing Overheads Variable Selling Expenses Fixed Selling Expenses Total Cost 19.50 12.50 7.50 13.50 4.00 6.00 63 Answers 1) Financila Advantage 2) Financial Advantage 3) Financial Disadvantage 204680 219800 123200 |

1) if Accept the retail Chain Offer at 16% Discount Price. For 14,000 rets Per unit | 14000 Units Sales Revenue 57.12 799680 Direct Material 19.50 273000 Direct labor 12.50 175000 Variable Manufacturing overheads 7.50 105000 Variable Selling Expenses 1.00 14000 Special Machine 28000 Net Operating income From Order 204680 Net profit Increase By 204680 2)IF Accept the US Army Order for Fixed fee of $2.20, and all Manufactruing Cost will Reimburse Per unit 14000 Units Fixed Fee Received 2.2 30800 Reimberse the Fixed MOH 13.5 189000 Incremental Net profit 219800 Net profit Increase By 219800

3) IF US Army order Accepted but Operating at full capacity. At Current operating Full Capacity Levele 36000 22000 Units Sales Revnue 24480001496000 Direct Material 7020001 429000 Direct labor 450000 275000 Variable Manufacturing overheads 270000 165000 Fixed Manufacturing Overheads 486000 486000 Variable Selling Expenses 1440001 88000 Fixed Selling Expenses 216000 216000 Total Cost 2268000 1659000 Net Profit 180000 -163000 219800 Increemtnal Analysis Increse in Net profit by Order Lose in profit for the Special Oder = | -163000-180000 Decrease in net Profit -343000 -123200 Net Profit Will Decrase by 123200