Direct materials $ 19.00 $ 646,000 Direct labour 12.00 408,000
Variable manufacturing overhead 7.00 238,000
Fixed manufacturing overhead 13.00 442,000
Variable selling expense 4.00 136,000
Fixed selling expense 6.00 204,000
Total cost $ 61.00 $ 2,074,000

The Rets normally sell for $66 each. Fixed manufacturing overhead is constant at $442,000 per year within the range of 21,000 through 34,000 Rets per year.

Required:

1. Assume that, due to a recession, Polaski Company expects to sell only 21,000 Rets through regular channels next year. A large retail chain has offered to purchase 13,000 Rets if Polaski is willing to accept a price lower than the regular $66. 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 13,000 units. This machine would cost $26,000. Polaski Company has no assurance that the retail chain will purchase additional units any time in the future. Determine the maximum discount that Polaski can offer to this large retail chain in order for it to be no worse off compared to its current profit.