Question

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 20 Total Direct materials 720,000 288,000 108,000 324,000 144,000 216,000 Direct labor 8 Variable manufacturing overhead Fixed manufacturing overhead Variable selling expense Fixed selling expense 3 9 4 6 50 1,800,000 Total cost The Rets normally sell for $55 each. Fixed manufacturing overhead is $324,000 per year within the range of 27,000 through 36,000 Rets per year. Required: 1. Assume that due to a recession, Polaski Company expects to sell only 27,000 Rets through regular channels next year. A large retail chain has offered to purchase 9,000 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 9,000 units. This machine would cost $18,000. 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 27,000 Rets through regular channels next year. The U.S. Army would like to make a one-time-only purchase of 9,000 Rets. The Army would pay a fixed fee of $1.80 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?

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 27000 9000 55 20.00 8.00 3.00 9.00 4.00 6.00 50 Answers 1) Financila Advantage 2) Financial Advantage 3) Financial Disadvantage 109800 97200 82800

1) if Accept the retail Chain Offer at 16% Discount Price. For 9,000 rets Per unit 9000 Units Sales Revenue 46.20 415800 Direct Material 20.00 180000 Direct labor 8.00 72000 Variable Manufacturing overheads 3.00 27000 Variable Selling Expenses 1.00 9000 Special Machine 18000 Net Operating income From Order 109800 Net profit Increase By 109800 2)IF Accept the US Army Order for Fixed fee of $1.80, and all Manufactruing Cost will Reimburse Per unit 9000 Units Fixed Fee Received 1.8 16200 Reimberse the Fixed MOH 81000 Incremental Net profit 97200 Net profit Increase By 97200

3) IF US Army order Accepted but Operating at full capacity. At Current operating Full Capacity Levele 36000 27000 Units Sales Revnue 1980000 1485000 Direct Material 720000 540000 Direct labor 288000 216000 Variable Manufacturing overheads 108000 81000 Fixed Manufacturing Overheads 324000 324000 Variable Selling Expenses 144000 108000 Fixed Selling Expenses 216000 216000 Total Cost 18000001485000 Net Profit 180000 97200 Increemtnal Analysis Increse in Net profit by Order Lose in profit for the Special Oder = (0-180000) Decrease in net Profit -180000 -82800 Net Profit Will Decrase by 82800