Question

Polaski Company manufactures and sells a single product called a Ret. Operating at capacity, the company can produce and sell 34,000 Rets per year. Costs associated with this level of production and sales are given below:

Unit Total
Direct materials $ 25 $ 850,000
Direct labor 6 204,000
Variable manufacturing overhead 3 102,000
Fixed manufacturing overhead 7 238,000
Variable selling expense 2 68,000
Fixed selling expense 6 204,000
Total cost $ 49 $ 1,666,000

The Rets normally sell for $54 each. Fixed manufacturing overhead is $238,000 per year within the range of 25,000 through 34,000 Rets per year.

Assume that due to a recession, Polaski Company expects to sell only 29,000 Rets through regular channels next year. A large retail chain has offered to purchase 7,000 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 chainâs name on the 7,000 units. This machine would cost $14,000. 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.

Answer 1

Answer:

$69020

Explanation:

Selling price -$54

Incremental selling price =54*(1-0.16)=45.36

Incremental sales - 45.36*7000= 317520

Contribution -

Direct materials = 24*7000 =     (168000)

Direct labor = 6*7000 =              (42000)

Variable manufacturing =           (21000)     (3*7000)

Variable selling price =                (3500)        2*(1-0.75)

Total contribution =                      83020

Additional cost of machine       (14,000)

Incremental profit                        69,020          

Answer 2

Net increase in profit on new machine is $62,020.

Calculation of the impact over profits next year.      

Particular                                                        Amount

New Revenue[7000 × $54 × (1-16%) ]           $317,520

Less: Direct Material Cost [7000 × $25]     $175,000

Less: Direct Labor Cost [7000 × $6]           $42,000            

Less: Variable M. Cost [7000 × $3]             $21,000  

Less: V. S. Expenses [7000 × 2 × (1-75%)]   $3,500  

Less: Cost of Special equipment                 $14,000

Net increase in profits                                  $62,020

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