Question

Problem 11-22 Special Order Decisions [LO11-4] 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 $ 15 $ 540,00 Direct labor 8 288, eee Variable manufacturing overhead 188,888 Fixed manufacturing overhead 9 324,000 Variable selling expense 72,eee Fixed selling expense 216.ee Total cost $ 43 $ 1,548,800 3 2 6 The Rets normally sell for $48 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 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? 1. Financial advantage 2. Financial advantage 3. Financial (disadvantage)

Answer 1

Total Capacity Current Operating Level Special Order Selling Price Direct Material Direct labor Variable Manufacturing overheads Fixed Manufacturing Overheads Variable Selling Expenses Fixed Selling Expenses Total Cost 36000 29000 7000 48 15.00 8.00 3.00 9.00 2.00 6.00 43 1) Financila Advantage (Net increase) 2) Financial Advantage (Net increase) 3) Financial Disadvantage (Net Decrease) 82740 74200 -65800 1) if Accept the retail Chain Offer at 16% Discount Price. For 7000 rets 7000 Rets Per unit 7000 Units Sales Revenue (48*(1-16%) 40.32 282240 Direct Material 15.00 105000 Direct labor 8.00 56000 Variable Manufacturing overheads 3.00 21000 Variable Selling Expenses (2*0.25) 0.50 3500 Special Machine 14000 Net Operating income From Order 82740 Net profit Increase By 82740

2)IF Accept the US Army Order for Fixed fee of and all 1.60) Manufactruing Cost will Reimburse Per unit 7000 Units Fixed Fee Received 1.60 11200 Reimberse the Fixed MOH 9.00 63000 Incremental Net profit 74200 Net profit Increase By 74200 3) IF US Army order Accepted but Operating at full capacity. Per Unit Sales Revnue 48 Direct Material 15 Direct labor 8 Variable Manufacturing overheads 3 Fixed Manufacturing Overheads Variable Selling Expenses 2 Fixed Selling Expenses Total Cost Net Profit Increemtnal Analysis Increse in Net profit by Order Lose in profit for the Special Oder =40000-180000 Decrease in net Profit At Current Full Capacity operating Levele 36000 29000 Units 1728000 1392000 540000 435000 288000 232000 108000 87000 324000 324000 72000 58000 216000 216000 1548000 1352000 180000 40000 74200 - 140000 -65800