PROBLEM 12-25 Accept or Reject a Special Order [L04] Polaski Company manufacture

Question

PROBLEM 12-25 Accept or Reject a Special Order [L04]
Polaski Company manufactures and sells a single product called a Ret. Operating at capacity, the company can produce and sell 30,000 Rets per year. Costs associated with this level of production and sales are given below:
Units Total
Direct materials . 15 450,000
Direct labor . 8 240,000
Variable manufacturing overhead .3 90,000
Fixed manufacturing overhead .9 270,000
Variable selling expense .4 120,000
Fixed selling expense . 6 180,000
Total cost . 45 1,350,000
The Rets normally sell for $50 each. Fixed manufacturing overhead is constant at $270,000 per year within the range of 25,000 through 30,000 Rets per year.
Required:
1. Assume that due to a recession, Polaski Company expects to sell only 25,000 Rets through regular channels next year. A large retail chain has offered to purchase 5,000 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 5,000 units. This machine would
cost $10,000. 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.
2. Refer to the original data. Assume again that Polaski Company expects to sell only 25,000 Rets through regular channels next year. The U.S. Army would like to make a one-time-only purchase of 5,000 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?
3. Assume the same situation as that described in (2) above, except that the company expects to sell 30,000 Rets through regular channels next year. Thus, accepting the U.S. Army's order would require giving up regular sales of 5,000 Rets. If the Army's order is accepted, by how much will profits increase or decrease from what they would be if the 5,000 Rets were sold through regular channels?

Explanation / Answer

Materials 15 Direct labor 8 variable manufacturing overheads 3 Variable selling expenses 1 (75% expenses are slashed Fixed manufacturing overheads 9 Fixed selling expenses 6 Total cost per unit 42 Total cost on 5000 units=42*5000 210,000.00 Cost of purchase of labelling machine 10,000.00 Total cost on 5000 units 220,000.00 Selling price per unit 42 50-16% Total sale price on 5000 units 42*5000 210,000.00 Less cost 220,000.00 Loss 10,000.00 US army wants to take 5000 rets by   allowing fixed fee per ret 1.8 Cost of production per unit 45 46.8 Sale price of 5000 units 46.8*5000 234,000.00 cost of 5000 units 45*5000 225,000.00 profit 9,000.00 sale of 30000 units at 50 per unit 1,500,000.00 cost of 30000 units at 45 per unit 1,350,000.00 profit on sale of 5000 units 150,000.00 Sale of 25000 units in open market 25000*50= 1,250,000.00 Sale of 5000 units to US army 234,000.00 Total sales 1,484,000.00 5000 Units of Us army cost 225,000.00 25ooo units cost @45 per unit 1,125,000.00 1,350,000.00 profit 134,000.00 Note: There will be a decrease of 16000 in profit if we sell 5000 to Us army instead of selling in ope n market

Related Questions

Navigate

• Browse (All)
• Browse P
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.