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 32,000 Rets per year. Costs associated with this level of production and sales are given below: Unit Total Direct materials $ 20 $ 640,000 Direct labor 8 256,000 Variable manufacturing overhead 3 96,000 Fixed manufacturing overhead 7 224,000 Variable selling expense 4 128,000 Fixed selling expense 6 192,000 Total cost $ 48 $ 1,536,000 The Rets normally sell for $53 each. Fixed manufacturing overhead is constant at $224,000 per year within the range of 27,000 through 32,000 Rets per year. Required: 1. Assume that due to a recession, Polaski Company expects to sell only 27,000 Rets through regular channels next year. A large retail chain has offered to purchase 5,000 Rets if Polaski is willing to accept a selling price of $44.52 per Ret, 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 in the future. Determine the impact on profits next year if this special order is accepted.

Solution

1) New contribution margin Selling price   53*(1-.16) 44.52 less :Variable expense Direct materials 20 Direct labor 8 variable manufacturing overhead 3 variable selling expense (4*25%) 1 total variable expense 32 -32 New contribution margin 12.52 total contribution margin (5000*12.52) 62600 less :cost of machine -10,000 Net income 52600 financail advantage 52,600 OR net profit increase by 52,600