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Polaski Company manufactures and sells a single product called a
Ret. Operating at capacity, the company can produce and sell 46,000
Rets per year. Costs associated with this level of production and
sales are given below:

 

 

Unit

Total

  Direct materials

$10  

$460,000  

  Direct labor

7  

322,000  

  Variable manufacturing overhead

2  

92,000  

  Fixed manufacturing overhead

9  

414,000  

  Variable selling expense

2  

92,000  

  Fixed selling expense

5  

230,000  

  Total cost

$35  

$1,610,000  

 

    The Rets normally sell for $67 each.
Fixed manufacturing overhead is constant at $414,000 per year
within the range of 26,000 through 46,000 Rets per year.

 
 Requirement 1:
Assume that due to a recession, Polaski Company expects to sell
only 26,000 Rets through regular channels next year. A large retail
chain has offered to purchase 4,000 Rets if Polaski is willing to
accept a 11% discount off the regular price. There would be no
sales commissions on this order; thus, variable selling expenses
would be slashed by 70%. However, Polaski Company would have to
purchase a special machine to engrave the retail chain’s name on
the 4,000 units. This machine would cost $8,000. Polaski Company
has no assurance that the retail chain will purchase additional
units in the future. Calculate the net increase/decrease in profits
next year if this special order is accepted. (Omit the “$”
sign in your response.)

Requirement 2:

Assume again that Polaski Company expects to sell only 26,000
Rets through regular channels next year. The U.S. Army would like
to make a one-time-only purchase of 4,000 Rets. The Army would pay
a fixed fee of $1.69 per Ret, and it would reimburse Polaski
Company for all costs of production (variable and fixed) associated
with the units. Because the army would pick up the Rets with its
own trucks, there would be no variable selling expenses associated
with this order. If Polaski Company accepts the order, by how much
will profits increase or decrease for the year? (Omit the
“$” sign in your response.)

Requirement 3:
Assume the same situation as that described in Requirement (2)
above, except that the company expects to sell 46,000 Rets through
regular channels next year. Thus, accepting the U.S. Army’s order
would require giving up regular sales of 4,000 Rets. If the Army’s
order is accepted, by how much will profits increase or decrease
from what they would be if the 4,000 Rets were sold through regular
channels? (Input the amount as positive value. Omit the “$”
sign in your response.)
 
 
 

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