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

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 26,000 Rets per year. Costs associated with this level of production and sales are as follows: Total Direct materials Direct labour Variable manufacturing Unit 10.00 5.00 $17.00 442,000 260,000 30,000 overhead Fixed manufacturing overhead Variable selling expense Fixed selling expense 11.00 4.00 6.00 286,000 04,000 156,000 Total cost $53.00 $1,378,000 The Rets normally sell for $58 each. Fixed manufacturing overhead is constant at $286,000 per year within the range of 17,000 through 26,000 Rets per year

Explanation / Answer

Profit From selling all Units in Regular In Market. (26,000 units)

$

Sales Revenue (26000*$58)

1508,000

Variable Cost

Direct Material

(442,000)

Direct Labor

(260,000)

Variable Manufacturing

(130,000)

Variable Selling Expenses

(104,000)

Contribution Margin

572,000

Fixed Manufacturing Overhead

(286,000)

Fixed Selling Expenses

(156,000)

Net Profit

130,000

If Sold In Regular Market at a Regular Price. (9,000) Units.

$

Sales Revenue (9000*$58)

52,2000

Variable Cost

Direct Material

(153,000)

Direct Labor

(90,000)

Variable Manufacturing

(45,000)

Variable Selling Expenses

(36,000)

Contribution Margin

324,000

Fixed Manufacturing Overhead

(99,000)

Fixed Selling Expenses

(54,000)

Net Profit

45,000

Profit by Selling rest through Canadian forces (9,000 units)

$

Sales Revenue ( 9,000*$54.60) (Note 1)

491,400

Variable Cost

Direct Material

(153,000)

Direct Labor

(90,000)

Variable Manufacturing

(45,000)

Variable Selling Expenses

(36,000)

Contribution Margin

167,400

Fixed Manufacturing Overhead

(99,000)

Fixed Selling Expenses

(54,000)

Net Loss

(14,400)

If 26,000 Units Sold Through Regular Market Net Profit = $130,000

If 17,000 units Sold Through Regular Market and the Ret through Canadian forces.

= Total profit by Selling 26,000 units in Regular Market- Profit giving up by the decision to sell through Canadian forces (That is the profit of 9000 units sold in Regular Market – loss by Selling Through Canadian forces Company.

$130,000-$45,000- $14,400= $70,600

So Net Profi After Decesiont= $130,000-$70,600 = $59,400

Net Dcrese profit before Decesion - ProfitAfter Decesion= $70,600-$59,400= $11,200

Note 1.

Selling Price to Canadian forces = all Cost associated with the product + 1.60

That is $53+$1.60= $54.60

$

Sales Revenue (26000*$58)

1508,000

Variable Cost

Direct Material

(442,000)

Direct Labor

(260,000)

Variable Manufacturing

(130,000)

Variable Selling Expenses

(104,000)

Contribution Margin

572,000

Fixed Manufacturing Overhead

(286,000)

Fixed Selling Expenses

(156,000)

Net Profit

130,000

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