Question - Polaski Company manufactures and sells a single product called "HTV-7". Operating at capacity, the company can produce and sell 30,000 units of HTV-7 per year. Costs associated with this level of production and sales are given below:
Per Unit Total
Direct materials $15 $450,000
Direct labor 8 240,000
Variable overhead 3 90,000
Fixed overhead 9 270,000
Variable selling expense 4 120,000
Fixed selling expense 6 180,000
Total cost $45 $1,350,000
HTV-7 sells for $50 per unit. Polaski Company expects to sell 25,000 units through regular channels next year.
A. A large retail chain has offered to purchase 5,000 units if Polaski is willing to accept a 16 percent discount off the regular selling price. Since there would be no sales commissions on this order, variable selling expenses would be slashed by 75 percent. However, Polaski would have to purchase a special machine in order to engrave the retail chain's name on the 5,000 units. This machine would cost $10,000.
1. By how much would Polaski Company's profits increase (or decrease) next year if it accepts this special order?
2. What is the minimum selling price that Polaski could charge for the special order units without decreasing the company's overall profits?
B. Refer to the original data. Assume again that Polaski Company expects to sell only 25,000 units next year through regular channels. The U.S. Army would like to make a one time only purchase of 5,000 units. The Army would pay a fixed fee of $1.80 per unit, and, in addition, it would reimburse Polaski Company for all variable costs of production associated with the special order units. Since the Army would pick up the units with its own trucks, there would be no variable selling expenses of any type associated with this order. By how much would Polaski Company's profits increase (or decrease) next year if it accepts this special order?
C. Assume the same situation as described in "B" except that Polaski expects to sell 30,000 units through regular channels next year. By how much would Polaski Company profits increase (or decrease) next year if it accepts this special order?
D. List at least two qualitative (that is, not quantitative) factors that Polaski Company should consider when making a decision as to whether to accept or reject a special order.