Question

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:
Unit 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:
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 any time 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 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 in addition it would reimburse Polaski Company for all costs of production (variable and fixed) associated with the units.
Since the army would pick up the Rets with its own trucks, there would be no variable selling expenses of any type associated with this order.
If Polaski Company accepts the order, by how much will profits be increased or decreased for the year. Assume the same situation as that described 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 be increased or decreased from what they would be if the 5,000 Rets were sold through regular channels?

Answer 1

Answer:

production level 30,000 units

production costs at that level:

• direct materials $15 per unit = $450,000
• direct labor $8 per unit = $240,000
• variable manufacturing overhead $3 per unit = $90,000
• fixed overhead $9 per unit = $270,000
• variable selling expense $4 per unit = $120,000
• fixed selling expense $6 per unit = $180,000
• total costs per unit $45 = $1,350,000

sales price $50 per unit, profit $5 per unit = $150,000

fixed manufacturing overhead constant between 25,000 - 30,000 units

scenario 1:

due to a recession, sales decrease to 25,000 units:

special order for 5,000 at $42 per unit

additional costs = $10,000 for special machine

                                   without special order     with special order

total units sold                  25,000                          30,000

total revenue                $1,250,000                  $1,460,000

- variable px costs        -$650,000                    -$780,000

- fixed ma. overhead    -$270,000                    -$270,000

gross profit                     $330,000                     $410,000

- variable selling exp.    -$100,000                     -$115,000

- fixed selling exp.         -$180,000                     -$180,000

- special machine                       $0                       -$10,000

net profit                          $50,000                      $105,000

profits will increase by $50,000 if the special order is accepted

scenario 2:

normal sales levels 30,000 units, Army wishes to purchase 5,000 units:

special order for 5,000 at production costs + $1.80

additional costs = $10,000 for special machine

                                   without special order     with special order

total units sold                  30,000                          30,000

total revenue                $1,500,000                  $1,434,000

- variable px costs        -$780,000                    -$780,000

- fixed ma. overhead    -$270,000                    -$270,000

gross profit                     $450,000                     $384,000

- variable selling exp.    -$120,000                     -$100,000

- fixed selling exp.         -$180,000                     -$180,000

net profit                          $150,000                     $104,000

profits will decrease by -$46,000 if the Army's special order is accepted