Polaski Company manufactures and sells a single product called a Ret. Operating at capacity, the company can produce and sell 34,000 Rets per year. Costs associated with this level of production and sales are given below:
Unit Total
Direct materials $ 25 $ 850,000
Direct labor 6 204,000
Variable manufacturing overhead 3 102,000
Fixed manufacturing overhead 7 238,000
Variable selling expense 2 68,000
Fixed selling expense 6 204,000
Total cost $ 49 $ 1,666,000
The Rets normally sell for $54 each. Fixed manufacturing overhead is $238,000 per year within the range of 25,000 through 34,000 Rets per year.
Assume that due to a recession, Polaski Company expects to sell only 29,000 Rets through regular channels next year. A large retail chain has offered to purchase 7,000 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 chainâs name on the 7,000 units. This machine would cost $14,000. 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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