Polaski Company manufactures and sells a single product calleda Ret. Operating at capacity, the company can produce and sell36,000 Rets per year. Costs associated with this level ofproduction and sales are given below:

  

	Unit			Total
Direct materials	$	20		$	720,000
Direct labor		10			360,000
Variable manufacturing overhead		3			108,000
Fixed manufacturing overhead		5			180,000
Variable selling expense		4			144,000
Fixed selling expense		6			216,000
Total cost	$	48		$	1,728,000

   

The Rets normally sell for $53 each. Fixed manufacturingoverhead is constant at $180,000 per year within the range of29,000 through 36,000 Rets per year.

  

Required:
1.	Assume that due to a recession, Polaski Company expects to sellonly 29,000 Rets through regular channels next year. A large retailchain has offered to purchase 7,000 Rets if Polaski is willing toaccept a 16% discount off the regular price. There would be nosales commissions on this order; thus, variable selling expenseswould be slashed by 75%. However, Polaski Company would have topurchase a special machine to engrave the retail chain’s name onthe 7,000 units. This machine would cost $14,000. Polaski Companyhas no assurance that the retail chain will purchase additionalunits in the future. Determine the impact on profits next year ifthis special order is accepted.

     

2.

Refer to the original data. Assume again that Polaski Companyexpects to sell only 29,000 Rets through regular channels nextyear. The U.S. Army would like to make a one-time-only purchase of7,000 Rets. The Army would pay a fixed fee of $1.80 per Ret, and itwould reimburse Polaski Company for all costs of production(variable and fixed) associated with the units. Because the armywould pick up the Rets with its own trucks, there would be novariable selling expenses associated with this order. If PolaskiCompany accepts the order, by how much will profits increase ordecrease for the year?

     

3.	Assume the same situation as that described in (2) above, exceptthat the company expects to sell 36,000 Rets through regularchannels next year. Thus, accepting the U.S. Army’s order wouldrequire giving up regular sales of 7,000 Rets. If the Army’s orderis accepted, by how much will profits increase or decrease fromwhat they would be if the 7,000 Rets were sold through regularchannels?