Reference no: EM132586967

Polaski Company manufactures and sells a single product called a Ret. Operating at capacity, the company can produce and sell 26,000 Rets per year. Costs associated with this level of production and sales are as follows:

                                            Unit                                   Total

Direct materials                   $17.00                       $442,000

Direct labour                       10.00                              260,000

Variable manufacturing overhead  5.00                              130,000

Fixed manufacturing overhead        11.00                         286,000

Variable selling expense                  4.00                          104,000

Fixed selling expense                       6.00                           156,000

Total cost                                  $53.00                         $1,378,000

The Rets normally sell for $58 each. Fixed manufacturing overhead is constant at $286,000 per year within the range of 17,000 through 26,000 Rets per year.

Required:

1. Assume that, due to a recession, Polaski Company expects to sell only 17,000 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 chain's 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 any time in the future.

Question 1: Determine the impact on profits next year if this special order is accepted.