4.

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	$	20		$	920,000
Direct labor		6			276,000
Variable manufacturing overhead		3			138,000
Fixed manufacturing overhead		5			230,000
Variable selling expense		4			184,000
Fixed selling expense		6			276,000
Total cost	$	44		$	2,024,000

The Rets normally sell for $49 each. Fixed manufacturing overhead is constant at $230,000 per year within the range of 36,000 through 46,000 Rets per year.

Required:

1.

Assume that due to a recession, Polaski Company expects to sell only 36,000 Rets through regular channels next year. A large retail chain has offered to purchase 10,000 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 chains name on the 10,000 units. This machine would cost $20,000. 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.

2.

Refer to the original data. Assume again that Polaski Company expects to sell only 36,000 Rets through regular channels next year. The U.S. Army would like to make a one-time-only purchase of 10,000 Rets. The Army would pay a fixed fee of $1.60 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? Assume the same situation as that described in (2) above, except that the company expects to sell 46,000 Rets through regular channels next year. Thus, accepting the U.S. Armys order would require giving up regular sales of 10,000 Rets. If the Armys order is accepted, by how much will profits increase or decrease from what they would be if the 10,000 Rets were sold through regular channels?

5.

Silven Industries, which manufactures and sells a highly successful line of summer lotions and insect repellents, has decided to diversify in order to stabilize sales throughout the year. A natural area for the company to consider is the production of winter lotions and creams to prevent dry and chapped skin.

After considerable research, a winter products line has been developed. However, Silvens president has decided to introduce only one of the new products for this coming winter. If the product is a success, further expansion in future years will be initiated.

The product selected (called Chap-Off) is a lip balm that will be sold in a lipstick-type tube. The product will be sold to wholesalers in boxes of 24 tubes for $7 per box. Because of excess capacity, no additional fixed manufacturing overhead costs will be incurred to produce the product. However, a $84,000 charge for fixed manufacturing overhead will be absorbed by the product under the companys absorption costing system.

Using the estimated sales and production of 140,000 boxes of Chap-Off, the Accounting Department has developed the following cost per box:

Direct materials	$	3.30
Direct labor		1.60
Manufacturing overhead		1.00
Total cost	$	5.90

The costs above include costs for producing both the lip balm and the tube that contains it. As an alternative to making the tubes, Silven has approached a supplier to discuss the possibility of purchasing the tubes for Chap-Off. The purchase price of the empty tubes from the supplier would be $1.30 per box of 24 tubes. If Silven Industries accepts the purchase proposal, direct labor and variable manufacturing overhead costs per box of Chap-Off would be reduced by 10% and direct materials costs would be reduced by 25%.

1a.	Calculate the total variable cost of producing one box of Chap-Off? (Round your intermediate calculations and final answer to 2 decimal places.)

1b.

Assume that the tubes for the Chap-Off are purchased from the outside supplier, calculate the total variable cost of producing one box of Chap-Off? (Round your intermediate calculations and final answer to 2 decimal places.)

2.	What would be the maximum purchase price acceptable to Silven Industries? (Round your intermediate calculations and final answer to 2 decimal places.)

3.	Instead of sales of 140,000 boxes, revised estimates show a sales volume of 160,000 boxes. At this new volume, additional equipment must be acquired to manufacture the tubes at an annual rental of $52,000. Assume that the outside supplier will not accept an order for less than 160,000 boxes.

a.	Calculate the total relevant cost of making 160,000 boxes and total relevant cost of buying 160,000 boxes. (Round intermediate calculations to 2 decimal places.)