Reference no: EM13596147
Polaski Company manufactures and sells a single product called a Ret. Operating at capacity, the company can produce and sell 37,000 Rets per year. Costs associated with this level of production and sales are given below:
- Unit Total
- Direct materials $12 $444,000
- Direct labor 6 222,000
- Variable manufacturing overhead 3 111,000
- Fixed manufacturing overhead 9 333,000
- Variable selling expense 1 37,000
- Fixed selling expense 4 148,000
- Total cost $35 $1,295,000
The Rets normally sell for $64 each. Fixed manufacturing overhead is constant at $333,000 per year within the range of 11,000 through 37,000 Rets per year.
Requirement 1:
Assume that due to a recession, Polaski Company expects to sell only 11,000 Rets through regular channels next year. A large retail chain has offered to purchase 4,500 Rets if Polaski is willing to accept a 15% discount off the regular price. There would be no sales commissions on this order; thus, variable selling expenses would be slashed by 56%. However, Polaski Company would have to purchase a special machine to engrave the retail chain's name on the 4,500 units. This machine would cost $4,500. Polaski Company has no assurance that the retail chain will purchase additional units in the future. Calculate the net increase/decrease in profits next year if this special order is accepted.
Requirement 2:
Assume again that Polaski Company expects to sell only 11,000 Rets through regular channels next year. The U.S. Army would like to make a one-time-only purchase of 4,500 Rets. The Army would pay a fixed fee of $1.79 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?
Requirement 3:
Assume the same situation as that described in Requirement (2) above, except that the company expects to sell 37,000 Rets through regular channels next year. Thus, accepting the U.S. Army's order would require giving up regular sales of 4,500 Rets. If the Army's order is accepted, by how much will profits increase or decrease from what they would be if the 4,500 Rets were sold through regular channels?