Problem 9-5 Determining Whether to Accept or Reject a Special Order (LO1 CC5) Po

Question

Problem 9-5 Determining Whether to Accept or Reject a Special Order (LO1 CC5) Polaski Company manufactures and sells a single product called a Ret. Operating at capacity, the company can produce and sell 32,000 Rets per year. Costs associated with this level of production and sales are as follows Unit Total Direct materials Direct labour Variable manufacturing $18.50 592,000 368,000 208,000 11.50 6.50 overhead Variable selling expense Fixed selling expense Fixed manufacturing overhead .50 4.00 6.00 400,000 128,000 192,000 Total cost $59.00 $1,888,000 The Rets normally sell for $64 each. Fixed manufacturing overhead is constant at $400,000 per year within the range of 20,000 through 32,000 Rets per year Required 1. Assume that, due to a recession, Polaski Company expects to sell only 20,000 Rets through regular channels next year. A large retail chain has offered to purchase 12,000 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 12,000 units. This machine would cost $24,000. 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

Explanation / Answer

1 12000 rets Per unit Amount Selling price 53.76 645120 Less Expense Direct material 18.5 222000 Direct labor 11.5 138000 Variable manufacturing overheads 6.5 78000 Variable selling expense 1 12000 Special machine 24000 Total expense 474000 Net operating profit 171120 Increase in profit 171120 2 Fixed fees 2 Direct material 18.5 Direct labor 11.5 Variable manufacturing overheads 6.5 Fixed manufacturing overheads 12.5 Total selling price 51 612000 Expense Direct material 18.5 222000 Direct labor 11.5 138000 Variable manufacturing overheads 6.5 78000 Total expense 36.5 438000 Net operating profit increase by 14.5 174000 3 Canadian forces Regular channels Fixed fees 2 Direct material 18.5 Direct labor 11.5 Variable manufacturing overheads 6.5 Fixed manufacturing overheads 12.5 Total selling price 51 64 Expense Direct material 18.5 18.5 Direct labor 11.5 11.5 Variable manufacturing overheads 6.5 6.5 Variable selling expense 0 4 Total expense 36.5 40.5 Net operating profit increase by 14.5 23.5 Difference 9 Units 12000 Rets Decrease in profit 108000

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