Question

Polaski Company manufactures and sells a single product called a Ret. Operating at capacity, the company can produce and sell 22,000 Rets per year. Costs associated with this level of production and sales are as follows: Director ed 10.00 220.000 Faed manufacturing v Variable ingespense Faed selling expense 549.00 $1.078.000 The Rets normally sell for $54 each. Fixed manufacturing overhead is constant at $220,000 per year within the range of 15,000 through 22,000 Rets per year. Required: 1. Assume that due to a recession, Polaski Company expects to sell only 15,000 Rets through regular channels next year. A large retail chain has offered to purchase 7.000 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 7.000 units. This machine would cost $14,000. 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 protest 2. Refer to the original data. Assume again that Polaski Company expects to sell only 15,000 Rets through regular channels next year. The Canadian Forces would like to make a one-time-only purchase of 7,000 Rets. The Forces would pay a fixed fee of $1.30 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?

Answer 1

1.

Sales [7000 x ($54 x {1 - 0.16})]		317520
Less: Expenses
Direct materials (7000 x $16)	112000
Direct labor (7000 x $9)	63000
Variable manufacturing overhead (7000 x $4)	28000
Variable selling expense [7000 x ($4 x {1 - 0.75})]	7000
Cost of special machine	14000
Total expenses		224000
Increase in profits $		93520

Note: The fixed manufacturing overhead will be incurred irrespective of whether the special order is accepted or not and hence is irrelevant.

2.

Revenue:
Fixed fee (7000 x $1.30)		9100
Reimbursement of costs
Direct materials (7000 x $16)	112000
Direct labor (7000 x $9)	63000
Variable manufacturing overhead (7000 x $4)	28000
Fixed manufacturing overhead (7000 x $10)	70000	273000
Total revenue		282100
Less: Expenses
Direct materials (7000 x $16)	112000
Direct labor (7000 x $9)	63000
Variable manufacturing overhead (7000 x $4)	28000
Total expenses		203000
Increase in profits $		79100

Note: Fixed manufacturing overhead will remain unchanged even if the one-time-only purchase order from the Canadian Forces is accepted since the production is within the relevant range. Hence, the same is not considered under the expenses however, since all variable and fixed costs of production will be reimbursed, the same is considered in the total revenue.

3.

Revenue from the Canadian Forces	282100
Revenue from regular customers (7000 x $54)	378000
Net increase (decrease) in revenue	-95900
Add: Savings in variable selling expenses (7000 x $4)	28000
Decrease in profits $	-67900