Question

4.

Polaski Companymanufactures and sells a single product called a Ret. Operating atcapacity, the company can produce and sell 46,000 Rets per year.Costs associated with this level of production and sales are givenbelow:

	Unit			Total
Directmaterials	$	20		$	920,000
Direct labor		6			276,000
Variablemanufacturing overhead		3			138,000
Fixed manufacturingoverhead		5			230,000
Variable sellingexpense		4			184,000
Fixed sellingexpense		6			276,000
Total cost	$	44		$	2,024,000

The Rets normally sell for $49each. Fixed manufacturing overhead is constant at $230,000 per yearwithin the range of 36,000 through 46,000 Rets per year.

Required:

1.

Assume that due to a recession, Polaski Company expects to sellonly 36,000 Rets through regular channels next year. A large retailchain has offered to purchase 10,000 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 10,000 units. This machine would cost $20,000. 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 36,000 Rets through regular channels nextyear. The U.S. Army would like to make a one-time-only purchase of10,000 Rets. The Army would pay a fixed fee of $1.60 per Ret, andit would 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? Assume the same situation as that described in (2) above, exceptthat the company expects to sell 46,000 Rets through regularchannels next year. Thus, accepting the U.S. Army’s order wouldrequire giving up regular sales of 10,000 Rets. If the Army’s orderis accepted, by how much will profits increase or decrease fromwhat they would be if the 10,000 Rets were sold through regularchannels?

5.

Silven Industries, which manufactures and sells a highlysuccessful line of summer lotions and insect repellents, hasdecided to diversify in order to stabilize sales throughout theyear. A natural area for the company to consider is the productionof winter lotions and creams to prevent dry and chappedskin.

Afterconsiderable research, a winter products line has been developed.However, Silven’s president has decided to introduce only one ofthe new products for this coming winter. If the product is asuccess, further expansion in future years will be initiated.

Theproduct selected (called Chap-Off) is a lip balm that will be soldin a lipstick-type tube. The product will be sold to wholesalers inboxes of 24 tubes for $7 per box. Because of excess capacity, noadditional fixed manufacturing overhead costs will be incurred toproduce the product. However, a $84,000 charge for fixedmanufacturing overhead will be absorbed by the product under thecompany’s absorption costing system.

Using theestimated sales and production of 140,000 boxes of Chap-Off, theAccounting Department has developed the following cost per box:

Directmaterials	$	3.30
Direct labor		1.60
Manufacturingoverhead		1.00
Total cost	$	5.90

The costs above include costs for producing both the lip balmand the tube that contains it. As an alternative to making thetubes, Silven has approached a supplier to discuss the possibilityof purchasing the tubes for Chap-Off. The purchase price of theempty tubes from the supplier would be $1.30 per box of 24 tubes.If Silven Industries accepts the purchase proposal, direct laborand variable manufacturing overhead costs per box of Chap-Off wouldbe reduced by 10% and direct materials costs would be reduced by25%.

1a.	Calculate the total variable cost of producing one box ofChap-Off? (Round your intermediate calculations and finalanswer to 2 decimal places.)

1b.

Assume that the tubes for the Chap-Off are purchased from theoutside supplier, calculate the total variable cost of producingone box of Chap-Off? (Round your intermediate calculationsand final answer to 2 decimal places.)

2.	What would be the maximum purchase price acceptable to SilvenIndustries? (Round your intermediate calculations and finalanswer to 2 decimal places.)

3.	Instead of sales of 140,000 boxes, revised estimates show asales volume of 160,000 boxes. At this new volume, additionalequipment must be acquired to manufacture the tubes at an annualrental of $52,000. Assume that the outside supplier will not acceptan order for less than 160,000 boxes.

a.	Calculate the total relevant cost of making 160,000 boxes andtotal relevant cost of buying 160,000 boxes. (Roundintermediate calculations to 2 decimal places.)