Question

Polaski Company manufactures and sells a single product called a Ret. Operating at capacity, the company can produce and sell 42,000 Rets per year. Costs associated with this level of production and sales are given below:

  

	Unit			Total
Direct materials	$	20		$	840,000
Direct labor		6			252,000
Variable manufacturing overhead		3			126,000
Fixed manufacturing overhead		7			294,000
Variable selling expense		2			84,000
Fixed selling expense		6			252,000
Total cost	$	44		$	1,848,000

   

The Rets normally sell for $49 each. Fixed manufacturing overhead is constant at $294,000 per year within the range of 33,000 through 42,000 Rets per year.

  

Required:
1.	Assume that due to a recession, Polaski Company expects to sell only 33,000 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 _________ BY _________

     

2.

Refer to the original data. Assume again that Polaski Company expects to sell only 33,000 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 ____________ BY__________

     

3.	Assume the same situation as that described in (2) above, except that the company expects to sell 42,000 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_______ BY________

Answer 1

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 42000 33000 9000 49 20.00 6.00 3.00 7.00 2.00 6.00 44 Answers 1) Financila Advantage (Net increase 2) Financial Advantage (Net increase) 3) Financial Disadvantage (Net Decrease) 86940 Increase 79200 Increase 82800 Decrease

.001 1) if Accept the retail Chain Offer at 16% Discount Price. For 9000 rets Per unit 9000 Units Sales Revenue 41.16 370440 Direct Material 20.00 180000 Direct labor 6.00 54000 Variable Manufacturing overheads 3.00 27000 Variable Selling Expenses 0.50 4500 Special Machine 18000 Net Operating income From Order 86940 Net profit Increase By 8 6940 2)IF Accept the US Army Order for Fixed fee of $1.80, and all Manufactruing Cost will Reimburse Per unit 9000 Units Fixed Fee Received 1.80 16200 Reimberse the Fixed MOH 17.00 63000 Incremental Net profit 79200 Net profit Increase By 79200

3) IF US Army order Accepted but Operating at full capacity. At Current operating Full Capacity Levele 42000 33000 Units Sales Revnue 2058000 1617000 Direct Material 840000 660000 Direct labor 252000 198000 Variable Manufacturing overheads 126000 99000 Fixed Manufacturing Overheads 2940001 294000 Variable Selling Expenses 84000 66000 Fixed Selling Expenses 252000 252000 Total Cost 1848000 1569000 Net Profit 210000 48000 79200 | Increemtnal Analysis Increse in Net profit by Order Lose in profit for the Special Oder = 480000-210000 Decrease in net Profit Net Profit Will Decrase by -162000 -82800 82800