Question

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Polaski Company manufactures and sells a single product called a Ret. Operating at capacity, the company can produce and sell 50,000 Rets per year. Costs associated with this level of production and sales are given below. Unit 520 $ Direct materials Direct labor Variable manufacturing overhead Fixed manufacturing overhead Variable selling expense Fixed selling expense Total cost Total 1.000.000 400,000 150,000 450,000 100,000 300,000 2,400,000 $ The Rets normally sell for $53 each. Fixed manufacturing overhead is $450,000 per year within the range of 42,000 through 50,000 Rets per year. Required: 1. Assume that due to a recession, Polaski Company expects to sell only 42000 Rets through regular channels next year. A large retai chain has offered to purchase 8,000 Rets if Polaski is willing to accept a 16% discount of the regular price. There would be no sales commissions on this order; thus, variable selling expenses would be slashed by 75%. However, Polasid Company would have to purchase a special machine to engrave the retail chain's name on the 8,000 units. This machine would cost $16.000. Polaski Company has no assurance that the retail chain will purchase additional units in the future. What is the financial advantage disadvantages 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 42.000 Rets through regular channels next year. The U.S. Army would like to make a one-time-only purchase of 8,000 Rets. The Army would pay a foxed fee of $160 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 50.000 Rets through regular channels next year. Thus, accepting the US Army's order would require giving up regular sales of 8.000 Rets. Given this new information, what is the financial advantage (disadvantage) of accepting the US Army's special order? 1. Financial advantage 2. Financial advantan 3 Financial (disadvantage) < Prey 5 of 5 Next > ere to search

Answer 1

1)	New contribution margin
	Selling price		53*(1-.16)			44.52
	less :Variable expense
	Direct materials				20
	Direct labor				8
	variable manufacturing overhead				3
	variable selling expense			(2*25%)	0.5
	total variable expense				31.5	-31.5
	New contribution margin					13.02
	total contribution margin			(8000*13.02)		104160
	less :cost of machine					-16,000
	Net income					88160
	financial advantage			88,160
2)	Fixed fee				1.6
	Fixed manufacturing overhead reimbursed				9
	total				10.6
	total contribution		8000*10.6		84800
	financial advantage		84,800
	(note though VMOH is also reimbursed ,it is not considered as the same amount
	will be incurred in production also)
3)	original contribution margin per unit
	Selling price					53
	less :Variable expense
	Direct materials				20
	Direct labor				8
	variable manufacturing overhead				3
	variable selling expense				2
	total variable expense				33	-33
	New contribution margin					20
	contribution lost		(8000*20)			-160000
	income from Army order					84,800
	Net loss					-75200
	Net profit will decrease by			-75200
	financial disadvantage			75,200	answer