Question

Polaski Company manufactures and sells a single product called a Ret. Operating at capacity, the company can produce and sell 40,000 Rets per year. Costs associated with this level of production and sales are given below: Unit $ 20 Direct materials Direct labor Variable manufacturing overhead Fixed manufacturing overhead Variable selling expense Fixed selling expense Total cost Now Total 800,000 400,000 120,000 360,000 160,000 240,000 $ 2,980,000 The Rets normally sell for $57 each. Fixed manufacturing overhead is $360,000 per year within the range of 32,000 through 40,000 Rets per year. Required: 1. Assume that due to a recession, Polaski Company expects to sell only 32,000 Rets through regular channels next year. A large retail chain has offered to purchase 8,000 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 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 (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 32.000. Rets through regular channels next.year..

Answer 1

40000 32000 8000 57 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 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) 95040 88000 72000

1) if Accept the retail Chain Offer at 16% Discount Price. For 8,000 rets Per unit 8000 Units Sales Revenue 47.88 383040 Direct Material 20.00 160000 Direct labor 10.00 80000 Variable Manufacturing overheads 3.00 24000 Variable Selling Expenses 8000 Special Machine 16000 Net Operating income From Order 95040 1.00 Net profit Increase By 95040 2)IF Accept the US Army Order for Fixed fee of $2.0, and all Manufactruing Cost will Reimburse Per unit 8000 Units Fixed Fee Received 2.00 16000 Reimberse the Fixed MOH 9.00 72000 Incremental Net profit 88000 9.00 Net profit Increase By 88000

3) IF US Army order Accepted but Operating at full capacity. At Current operating Full Capacity Levele 40000 32000 Units Sales Revnue 2280000 1824000 Direct Material 800000 640000 Direct labor 400000 320000 Variable Manufacturing overheads 120000 96000 Fixed Manufacturing Overheads 3600001 360000 Variable Selling Expenses 1600001 128000 Fixed Selling Expenses 240000 240000 Total Cost 20800001784000 Net Profit 200000 40000 88000 Increeminal Analysis Increse in Net profit by Order Lose in profit for the Special Oder = 40000-200000 Decrease in net Profit -160000 -72000 Net Profit Will Decrase by 72000