Company manufactures and sells a single product called a Ret. Operating at capac

Question

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 given below: The Rets normally sell for $54 each. Fixed manufacturing overhead is constant at $160,000 per year within the range of 26,000 through 32,000 Rets per year. Required: Assume that due to a recession, Polaski Company expects to sell only 26,000 Rets through regular channels next year. A large retail chain has offered to purchase 6,000 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 6,000 units. This machine would cost $12,000. 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. Refer to the original data. Assume again that Polaski Company expects to sell only 26,000 Rets through regular channels next year. The U.S. Army would like to make a one-time-only purchase of 6,000 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? Assume the same situation as that described in (2) above, except that the company expects to sell 32,000 Rets through regular channels next year. Thus, accepting the U.S. Army's order would require giving up regular sales of 6,000 Rets. If the Army's order is accepted, by how much will profits increase or decrease from what they would be if the 6,000 Rets were sold through regular channels?

Explanation / Answer

Polaski Company All Amounts in $ 1. If the special order is accepted From From Special Total Existing Order Units Revenue 1404000 272160 1676160 Costs As given @ $ 49 1274000 1274000 For Special Order Other than Variable Selling Expense 270000 270000 Engraving Costs 12000 12000 Selling Expenses 6000 6000 130000 -15840 114160 If the special order is accepted, the Net Profits of the Company decrease by $ 15,840. 2. If the special order from the Army is accepted From From Special Total Existing Order Units Revenue 1404000 280800 1684800 Costs As given @ $ 49 1274000 1274000 For Special Order Other than Variable Selling Expense 270000 270000 130000 10800 140800 If the special order from the Army is accepted, the Net Profits of the Company increase by $10,800. 3. If the regular sales are 32,000, then Polaski Company wil lhave to forego a profit of $ 30,000 (6,000 units X $ 5 each). This will be set off against the gains from the special order amounting to $ 10,800, thereby leading to a Net Reduction in the Net Profits of the Company by $ 19,200.

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