Question

Polaski Company manufactures and sells a single product called a Ret. Operating at capacity, the company can produce and sell 34,000 Rets per year. Costs associated with this level of production and sales are given below:

	Unit				Total
Direct materials	$	20			$	680,000
Direct labor		6				204,000
Variable manufacturing overhead		3				102,000
Fixed manufacturing overhead		5				170,000
Variable selling expense		4				136,000
Fixed selling expense		6				204,000
Total cost	$	44			$	1,496,000

The Rets normally sell for $49 each. Fixed manufacturing overhead is $170,000 per year within the range of 26,000 through 34,000 Rets per year.

Required: (Please help with Q3 only)

1. Done
2. Done (Refer to the original data. Assume again that Polaski Company expects to sell only 26,000 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 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?) listed for reference/context for question 3 only

3. Assume the same situation as described in (2) above, except that the company expects to sell 34,000 Rets through regular channels next year. Thus, accepting the U.S. Army’s order would require giving up regular sales of 8,000 Rets. Given this new information, what is the financial disadvantage of accepting the U.S. Army's special order?

Answer 1

Please find below table useful to compute desired results: -

А B C 1 03 Incremental Revenue =8000*1.8 Additional recovery of Fixed manufacturing overhead 1=8000*5 Less: Loss on Contribution on regular units =-8000*(49-20-6-3-4) Net Decrease in profits =SUM(C1:C3)

End results would be as follows: -

в 1 03 | 2 Incremental Revenue Additional recovery of Fixed manufacturing overhead Less: Loss on Contribution on regular units Net Decrease in profits 14,400 40,000 (128,000) (73,600)