Question
Polaski Company manufactures and sells a single product called a Ret. Operating at capacity, the company can produce and sell 40,000 Rets per year. Costs
Polaski Company manufactures and sells a single product called a Ret. Operating at capacity, the company can produce and sell 40,000 Rets per year. Costs associated with this level of production and sales are given below: Unit Total Direct materials $ 20 $ 800,000 Direct labor 6 240,000 Variable manufacturing overhead 3 120,000 Fixed manufacturing overhead 9 360,000 Variable selling expense 4 160,000 Fixed selling expense 6 240,000 Total cost $ 48 $ 1,920,000 The Rets normally sell for $53 each. Fixed manufacturing overhead is constant at $360,000 per year within the range of 31,000 through 40,000 Rets per year.
1. | Assume that due to a recession, Polaski Company expects to sell only 31,000 Rets through regular channels next year. A large retail chain has offered to purchase 9,000 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 9,000 units. This machine would cost $18,000. 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. | ||||
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