Question
Psaki Inc. manufactures and sells a single product called a Shiner. Operating at capacity, the company can produce and sell 42,000 Shiners per year. Costs
Psaki Inc. manufactures and sells a single product called a Shiner. Operating at capacity, the company can produce and sell 42,000 Shiners per year. Costs associated with this level of production and sales are as follows:
Unit | Total | |||||
Direct materials | $ | 21.00 | $ | 882,000 | ||
Direct labour | 14.00 | 588,000 | ||||
Variable manufacturing overhead | 9.00 | 378,000 | ||||
Fixed manufacturing overhead | 15.00 | 630,000 | ||||
Variable selling expense | 4.00 | 168,000 | ||||
Fixed selling expense | 6.00 | 252,000 | ||||
Total cost | $ | 69.00 | $ | 2,898,000 | ||
The Shiners normally sell for $74 each. Fixed manufacturing overhead is constant at $630,000 per year within the range of 25,000 through 42,000 Shiners per year.
Required:
1. Assume that, due to a recession, Psaki Company expects to sell only 25,000 Shiners through regular channels next year. A large retail chain has offered to purchase 17,000 Shiners if Psaki is willing to accept a price lower than the regular $74. There would be no sales commissions on this order; thus, variable selling expenses would be slashed by 75%. However, Psaki Company would have to purchase a special machine to engrave the retail chains name on the 17,000 units. This machine would cost $34,000. Psaki Company has no assurance that the retail chain will purchase additional units anytime in the future. Determine the maximum discount that Psaki 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.)
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