Polaski Company manufactures and sells a single product called a Ret. Operating at capacity, the company can produce and sell 58,000 Rets per year. Costs associated with this level of production and sales are as follows:

	Unit			Total
Direct materials	$	25.00		$	1,450,000
Direct labour		18.00			1,044,000
Variable manufacturing overhead		13.00			754,000
Fixed manufacturing overhead		19.00			1,102,000
Variable selling expense		4.00			232,000
Fixed selling expense		6.00			348,000
Total cost	$	85.00		$	4,930,000

The Rets normally sell for $90 each. Fixed manufacturing overhead is constant at $1,102,000 per year within the range of 33,000 through 58,000 Rets per year.

Required:

1. Assume that, due to a recession, Polaski Company expects to sell only 33,000 Rets through regular channels next year. A large retail chain has offered to purchase 25,000 Rets if Polaski is willing to accept a price lower than the regular $90. 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 25,000 units. This machine would cost $50,000. Polaski Company has no assurance that the retail chain will purchase additional units any time in the future. Determine the maximum discount that Polaski can offer to this large retail chain in order for it to be no worse off compared to its current profit. (Do not round intermediate calculations. Round your percentage answer to nearest whole number.)

Maximum Discount_________%

2. Refer to the original data. Assume again that Polaski Company expects to sell only 33,000 Rets through regular channels next year. The Canadian Forces would like to make a one-time-only purchase of 25,000 Rets. The Forces would pay a fixed fee of $3.50 per Ret, and in addition would reimburse Polaski Company for all costs of production (variable and fixed) associated with the units. Since the Forces would pick up the Rets with its own trucks, there would be no variable selling expenses of any type associated with this order. If Polaski Company accepts this order, by how much will profits be increased or decreased for the year? (Do not round intermediate calculations.)

3. Assume again that Polaski Company expects to sell only 58,000 Rets through regular channels next year. The Canadian Forces would like to make a one-time-only purchase of 25,000 Rets. The Forces would pay a fixed fee of $3.50 per Ret, and in addition would reimburse Polaski Company for all costs of production (variable and fixed) associated with the units. Thus, accepting the Canadian Forces order would require giving up regular sales of 25,000 Rets. Since the Forces would pick up the Rets with its own trucks, there would be no variable selling expenses of any type associated with this order. Compute the minimum fixed fee per unit that Polaski must receive from the Canadian Forces (in addition to the reimbursement of production costs) in order to accept this order. (Do not round intermediate calculations.)

Next question;

Troy Engines Ltd. manufactures a variety of engines for use in heavy equipment. The company has always produced all of the necessary parts for its engines, including all of the carburetors. An outside supplier has offered to produce and sell one type of carburetor to Troy Engines Ltd. for a cost of $41 per unit. To evaluate this offer, Troy Engines Ltd. has gathered the following information relating to its own cost of producing the carburetor internally:

1. Direct materials cost $20 per unit.
2. Troy Engines pays its direct labour employees $20 per hour; each carburetor requires 30 minutes of labour time.
3. Variable manufacturing overhead is allocated at 30% of direct labour cost.
4. Total fixed manufacturing cost amounts to $15 per unit, of which 60% is allocated common cost and the remaining 40% covers depreciation of special equipment and supervisory salaries. The special equipment has no resale value. Supervisory personnel will be transferred to a different department if the company decides to purchase the carburetor from the outside supplier.
5. Yearly production of this type of carburetor is 15,600 units.

Required:

1-a. Assume that the company has no alternative use for the facilities that are now being used to produce the carburetors. Compute the total differential cost per unit for producing and buying the product.

1-b. Should the outside suppliers offer be accepted?

multiple choice 1

Yes

No

2-a. Suppose that if the carburetors were purchased, Troy Engines Ltd. could use the freed capacity to launch a new product. The segment margin of the new product would be $150,000 per year. Compute the total differential cost for producing and buying the product.

2-b. Should Troy Engines Ltd. accept the offer to buy the carburetors for $41 per unit?

multiple choice 2

Yes

No