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 48,000 Rets per year. Costs associated with this level of production and sales are as follows Total Direct materials Direct labour Variable manufacturing $22.50 $1,080,000 744,000 504,000 Unit 15.50 10.50 overhead Fixed manufacturing overhead Variable selling expense Fixed selling expense 16.50 4.00 6.00 792,000 192,000 288,000 Total cost $75.00 $3,600,000 The Rets normally sell for $80 each. Fixed manufacturing overhead is constant at $792,000 per year within the range of 28,000 through 48,000 Rets per year Required 1. Assume that, due to a recession, Polaski Company expects to sell only 28,000 Rets through regular channels next year. A large retail chain has offered to purchase 20,000 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 20,000 units. This machine would cost $40,000. 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

Unit price Total
20000 Units
Revenue from the order 67.2 1344000
Less Costs associated with the order;
Direct Materials 22.5 450000
Direct Labor 15.5 310000
Variable Manufacturing Overhead 10.5 210000
Variable Selling Expense 1 20000
Special Machine 2 40000
Total Costs 51.5 257500
Net Increase in Profits 15.7 1086500

Net Increase in Profits by 1,086,500