Polaski Company manufactures and sells a single product called aRet. Operating at capacity, the company can produce and sell 44,000Rets per year. Costs associated with this level of production andsales are given below: Unit Total Direct materials $ 15 $ 660,000Direct labor 6 264,000 Variable manufacturing overhead 3 132,000Fixed manufacturing overhead 9 396,000 Variable selling expense 288,000 Fixed selling expense 6 264,000 Total cost $ 41 $ 1,804,000The Rets normally sell for $46 each. Fixed manufacturing overheadis constant at $396,000 per year within the range of 37,000 through44,000 Rets per year. Required: 1. Assume that due to a recession,Polaski Company expects to sell only 37,000 Rets through regularchannels next year. A large retail chain has offered to purchase7,000 Rets if Polaski is willing to accept a 16% discount off theregular 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 engravethe retail chain’s name on the 7,000 units. This machine would cost$14,000. Polaski Company has no assurance that the retail chainwill purchase additional units in the future. Determine the impacton profits next year if this special order is accepted. 2. Refer tothe original data. Assume again that Polaski Company expects tosell only 37,000 Rets through regular channels next year. The U.S.Army would like to make a one-time-only purchase of 7,000 Rets. TheArmy would pay a fixed fee of $2.00 per Ret, and it would reimbursePolaski Company for all costs of production (variable and fixed)associated with the units. Because the army would pick up the Retswith its own trucks, there would be no variable selling expensesassociated with this order. If Polaski Company accepts the order,by how much will profits increase or decrease for the year? 3.Assume the same situation as that described in (2) above, exceptthat the company expects to sell 44,000 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?
