Question

3 Polaski Company manufactures and sells a single product called a Ret. Operating at capacity, the company can produce and sell 44,000 Rets per year. Costs associated with this level of production and sales are given below: Unit $ 20 points $ Direct materials Direct labor Variable manufacturing overhead Fixed manufacturing overhead Variable selling expense Fixed selling expense Total cost Total 882.ee 440,000 132.000 396.899 176,00 264,00 2.288.888 eBook $ The Rets normally sell for $57 each. Fixed manufacturing overhead is $396,000 per year within the range of 35.000 through 44,000 Rets per year. Required: 1. Assume that due to a recession, Polaskl Company expects to sell only 35.000 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 Polaskl Company expects to sell only 35.000 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 $1.60 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 44.000 Rets through regular channels next year. Thus, accepting the U.S. Army's order would require giving up regular sales of 9,000 Rets. Given this new Information, 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 44000 35000 9000 57 20.00 10.00 3.00 9.00 4.00 6.00 52 Answers 1) Financila Advantage (Net increase) 2) Financial Advantage (Net increase) 3) Financial Disadvantage (Net Decrease) 106920 Increase 95400 Increase 84600 Decrease

1) if Accept the retail Chain Offer at 16% Discount Price. 9000 Rets Per unit 9000 Unit Sales Revenue 47.88 430920 Direct Material 20.00 180000 Direct labor 10.00 90000 Variable Manufacturing overheads 3.00 27000 Variable Selling Expenses 1.00 9000 Special Machine 18000 Net Operating income From Order 106920 Net profit Increase By 106920 1.60 2)IF Accept the US Army Order for Fixed fee of and all Manufactruing Cost will Reimburse Per unit Fixed Fee Received 1.60 Reimberse the Fixed MOH 9.00 Incremental Net profit 9000 Units 14400 81000 95400 Net profit Increase By 95400

3) IF US Army order Accepted but Operating at full capacity. At Current operating Full Capacity Levele 44000 35000 Units Sales Revnue 2508000 1995000 Direct Material 880000 700000 Direct labor 440000 350000 Variable Manufacturing overheads 132000 105000 Fixed Manufacturing Overheads 396000 396000 Variable Selling Expenses 176000 140000 Fixed Selling Expenses 264000 264000 Total Cost 22880001955000 Net Profit 220000 40000 95400 Increemtnal Analysis Increse in Net profit by Order Lose in profit for the Special Oder =40000-220000 Decrease in net Profit -180000 -84600 Net Profit Will Decrase by 84600