Potaski Compamny manufactures and sets a singie product called a Ret Operating a

Question

Potaski Compamny manufactures and sets a singie product called a Ret Operating at capacity, and sales are given below the company can produce and seil 34.000 Rets per year Costs associated with this kevet of productio Unit s 25 10 Direct materials Direct laber Vasiable manufachuring overheatd Flxed manufacturing overhead Variable seling expense Fxed seling expense otal cos 850,000 40 000 102 000 238.000 68,000 204,000 S 1,802,000 5 53 The Rets normally sel tor $50 each Fixed manutacturing overthead is constane at $238 000 per year wilthin the range of 27,000 through 34 000 Rets per year Required: Assume that due to a recession, Poaski Company expects to sell only 27,000 Rets theough regular channels next year A arge retal chan has offered to purchase 7,000 Rets Polask accept a 16% ascount ofthe regular price There would be no purchase a special machine to engrave the retail chain's name on the 7,000 units in the future Determine the impact on peonts next year if this special order is accepred p ny mud ha sa es con msscnson t s oroer itus varatie seling expenses wood be siashed by 75% ,towever Poinki C t unts This machine would cost $14.000 Polas Company has no assurance that the retail chain will purchase addniona 67 5

Explanation / Answer

1 Because the fixed costs will not change as a result of the order, they are not relevant to the decision. The cost of the new machine is relevant, and this cost will have to be recovered by the current order because there is no assurance of future business from the retail chain. Total- Unit 7,000 units Sales from the order ($58 x 84%) $          48.72 $      341,040 Less costs associated with the order: Direct materials              25.00          175,000 Direct labor              10.00            70,000 Variable manufacturing overhead                3.00            21,000 Variable selling expense ($2 x 25%)                0.50              3,500 Special machine ($14,000 ÷ 7,000 units)                2.00            14,000 Total costs              40.50          283,500 Net increase in profits $            8.22 $        57,540 2 Sales from the order: Reimbursement for costs of production (variable production costs of $38 plus fixed manufacturing overhead cost of $7 = $45 per unit; $45 per unit x 7,000 units) $      315,000 Fixed fee ($1.60 per unit x 7,000 units)            11,200 Total revenue          326,200 Less incremental costs-variable production costs ($38 per unit x 7,000 units)          266,000 Net increase in profits $        60,200 3 Sales: From the US Army (above) $      326,200 From regular channels ($58 per unit x 7,000 units)          406,000 Net decrease in revenue          (79,800) Less variable selling expenses avoided if the Army's order is accepted ($2 per unit x 7,000 units)            14,000 Net decrease in profits if the Army's order is accepted          (65,800)

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