12 Polaski Company manufactures and sells a single product called a Ret. Operati

Question

12 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 given below Total Unit 20 $ Direct materials Direct labor Variable manufacturing 720,000 216,000 108,000 6 overhead Fixed manufacturing overhead 5 Variable selling expense Fixed selling expense 4 6 180,000 144,000 216,000 44 1,584,000 Total cost The Rets normally sell for $49 each. Fixed manufacturing overhead is per year. Required: constant at $180,000 per year within the range of 28,000 through 36,000 Rets 1. Assume that due to a recession, Polaski Company expects to sell only 28,000 Rets through regular channels next year. A large retail chain has offered to purchase 8,000 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 8,000 units. This machine would cost $16,000. 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 et profit

Explanation / Answer

Polasky Company Existing year Per unit Sale of 36000 units through regular channels Sales units 36000 Sale price 49 Sales Revenue 1764000 Less : Variable cost Direct Materials 20 720000 Direct Labor 6 216000 Variable Manufacturing overheads 3 108000 Variable selling expense 4 144000 Total Variable cost 1188000 Margin 576000 Less : Fixed cost Fixed Manufacturing overheads 180000 Fixed selling expense 216000 Total Fixed Cost 396000 Net Income 180000 Requirement 1 Per unit Sale of 28000 units through regular channels Sale of 8000 units to large retail sale Total Sales units 28000 8000 36000 Sale price 49 41.16 Sales Revenue 1372000 329280 1701280 Less : Variable cost Direct Materials 20 560000 160000 720000 Direct Labor 6 168000 48000 216000 Variable Manufacturing overheads 3 84000 24000 108000 Variable selling expense 4 112000 8000 120000 Total Variable cost 924000 240000 1164000 Margin 448000 89280 537280 Less : Fixed cost Fixed Manufacturing overheads 180000 Special cost of machine 16000 Fixed selling expense 216000 Total Fixed Cost 412000 Net Income 125280 Net profit Decrease by 54720 Requirement 2 Per unit Sale of 28000 units through regular channels Sale of 8000 units to The U.S. Army Total Sales units 28000 8000 36000 Sale price 49 35.60 Sales Revenue 1372000 284800 1656800 Less : Variable cost Direct Materials 20 560000 160000 720000 Direct Labor 6 168000 48000 216000 Variable Manufacturing overheads 3 84000 24000 108000 Variable selling expense 4 112000 0 112000 Total Variable cost 924000 232000 1156000 Margin 448000 52800 500800 Less : Fixed cost Fixed Manufacturing overheads 180000 Fixed selling expense 216000 Total Fixed Cost 396000 Net Income 104800 Net profit Decrease by 75200 Compared to original calculations Requirement 3 The answer is same as in requirement 2

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