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?

(Prepared from a situation suggested by Professor John W. Hardy.) Lone Star Meat Packers is a major processor of beef and other meat products. The company has a large amount of T-bone steak on hand, and it is trying to decide whether to sell the Tbone steaks as they are initially cut or to process them further into filet mignon and the New York cut If the T-bone steaks are sold as initially cut, the company figures that a 1-pound T-bone steak would yield the following profit: Selling price ($2.30 per pound) 2.30 Less joint costs incurred up to the split-off point where T-bone steak can be identified as a separate product 1.25 Profit per pound 1.05 As mentioned above, instead of being sold as initially cut, the T-bone steaks could be further processed into filet mignon and New York cut steaks. Cutting one side of a T-bone steak provides the filet mignon, and cutting the other side provides the New York cut. One 16-ounce T-bone steak cut in this way will yield one 6-ounce filet mignon and one 8-ounce New York cut, the remaining ounces are waste. The cost of processing the Tbone steaks into these cuts is $0.13 per pound. The filet mignon can be sold for $4.40 per pound, and the New York cut can be sold for $3.20 per pound. Required: 1. Determine the profit per pound from processing the T-bone steaks into filet mignon and New York cut steaks. (Do not round intermediate calculations. Round your answers to 2 decimal places.) Per 16-ounce T-Bone Sales from further processing: Sales price of one filet mignon Sales price of one New York cut Total revenue from further processing Less sales revenue from one bone steak Incremental revenue from further processing Less cost of further processing Profit (loss) per pound from further processing