Polaski Company manufactures and sells a single product call

Polaski Company manufactures and sells a single product called a Ret. Operating at capacity, the company can produce and sell 40,000 Rets per year. Costs associated with this level of production and sales are as follows Unit Total Direct materials Direct labour Variable manufacturing $20.50 $ 820,000 540,000 340,000 13.50 8.50 overhead Fixed manufacturing overhead Variable selling expense Fixed selling expense 14.50 4.00 6.00 580,000 160,000 240,000 Total cost $67.00 $2,680,000 The Rets normally sell for $72 each. Fixed manufacturing overhead is constant at $580,000 per year within the range of 24,000 through 40,000 Rets per year. Required 1. Assume that, due to a recession, Polaski Company expects to sell only 24,000 Rets through regular channels next year. A large retail chain has offered to purchase 16,000 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 16,000 units. This machine would cost $32,000. 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 in profits

Solution

1. An additional profit of 247,680 will be generated by accepting retail chain order.

2. An additional profit of 38,400 will be generated by accepting canadian army order.

3. By accepting canadian army order, instead of selling through regular channel profit of 369,600 will be decreased.

particulars	Regular sale(total 24000 units)	If retail chain offer is accepted (additional 16000 units)	Canadian army offer is accepted (additional 16000 units)	If Canadian army order is not accepted (i.e. additional 16000 units sold through regular route)
Total Sales	1728000	967680	38400	1152000
Price per unit = 72	Price per unit = 72*(84%) = $ 60.48	Profit per unit = 2.4	Price per unit = 72
No of units = 24,000	No of units = 16,000	No of units = 16,000	No of units = 16,000
Variable costs	1116000	688000	0	744000
46.5 * 24000	43 * 16000	All costs are reimbursed	46.5 * 16000
Special order costs		32000
Fixed costs	820000	0	0	0
580000+240000	As fixed costs are already considered for 24000 units production	As fixed costs are already considered for 24000 units production	As fixed costs are already considered for 24000 units production
Profit	($208,000)	$247,680	$38,400	$408,000