Question

Polaski Company manufactures and sells a single product called a Ret. Operating at capacity, the company can produce and...

Polaski Company manufactures and sells a single product called a Ret. Operating at capacity, the company can produce and sell 36,000 Rets per year. Costs associated with this level of production and sales are given below:

Unit Total
Direct materials $ 20 $ 720,000
Direct labor 10 360,000
Variable manufacturing overhead 3 108,000
Fixed manufacturing overhead 9 324,000
Variable selling expense 2 72,000
Fixed selling expense 6 216,000
Total cost $ 50 $ 1,800,000

The Rets normally sell for $55 each. Fixed manufacturing overhead is $324,000 per year within the range of 29,000 through 36,000 Rets per year.

Required:

1. 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 chain’s 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. What is the financial advantage (disadvantage) of accepting the special order? (Round your intermediate calculations to 2 decimal places.)

2. Refer to the original data. Assume again that Polaski Company expects to sell only 29,000 Rets through regular channels next year. The U.S. Army would like to make a one-time-only purchase of 7,000 Rets. The Army would pay a fixed fee of $1.60 per Ret, and it would reimburse Polaski Company for all costs of production (variable and fixed) associated with the units. Because the army would pick up the Rets with its own trucks, there would be no variable selling expenses associated with this order. What is the financial advantage (disadvantage) of accepting the U.S. Army's special order?

3. Assume the same situation as described in (2) above, except that the company expects to sell 36,000 Rets through regular channels next year. Thus, accepting the U.S. Army’s order would require giving up regular sales of 7,000 Rets. Given this new information, what is the financial advantage (disadvantage) of accepting the U.S. Army's special order?

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Answer #1

1.FIXED COST are constant they will not change with acceptance of order so they are irrelevant

sales 323400 55-16%=46.2*7000
less relevant costs
direct material 140000 20*7000
labor 70000 10*7000
variable manufacturing overhead 21000 3*7000
variable selling expenses 3500 2*25%*7000
special machine 14000
total costs 248500
Net increase in income 74900$
financial advantage of accepting order is 74900$

2.

reimbursement 42 [20+10+3+9]
fixed fee 1.60
sales price 43.6 42+1.6
Less: variable costs relevant 33 [20+10+3]
net increase in profit per unit 10.6 [42+1.60-33]
Net total increase in profit 74200$ 10.6*7000
financial advantage is 74200$

3.

loss of regular sales 385000 [7000*55]
sales to Army 305200 [7000*43.6]
net loss of sales 79800 [385000-305200]
Less:
savings in variable selling expense if sold to army 14000 [7000*2$]
net disadvantage 65800$ [79800-14000]
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