velue: 5.00 points Polaski Company manufactures and sells a single product calle

Question

velue: 5.00 points Polaski Company manufactures and sells a single product called a Ret. Operating at capacity, the company can produce and sell 40,000 Rets per year. Costs associated with this level of production and sales are given below Unit S 15 Total Direct materials Direct labor Variable manufacturing overhead Fixed manufacturing overhead Variable selling expense Fixed selling expense Total cost S 600,000 240,000 120,000 280,000 80,000 240,000 S 39 S 1,560,000 The Rets normally sell for $44 each. Fixed manufacturing overhead is constant at $280,000 per year within the range of 35,000 through 40,000 Rets per year Required 1. Assume that due to a recession, Polaski Company expects to sell only 35,000 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. ofit

Explanation / Answer

1) New contribution margin Selling price   44*(1-.16) 36.96 less :Variable expense Direct materials 15 Direct labor 6 variable manufacturing overhead 3 variable selling expense (2*25%) 0.5 total variable expense 24.5 -24.5 New contribution margin 12.46 total contribution margin (5000*12.46) 62300 less :cost of machine -10,000 Net income 52300 Net profit increases by 52,300 2) Fixed fee 1.4 Fixed manufacturing overhead reimbursed 7 total 8.4 total contribution   5000*8.4 42000 Net profit increase by 42,000 (note though VMOH is also reimbursed ,it is not considered as the same amount will be incurred in production also) 3) original contribution margin per unit Selling price   44 less :Variable expense Direct materials 15 Direct labor 6 variable manufacturing overhead 3 variable selling expense 2 total variable expense 26 -26 New contribution margin 18 contribution lost (5000*18) -90000 income from Army order 42,000 Net loss -48000 Net profit will decrease by -48000 financial disadvantage 48,000 answer

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