Question

Polaski Company manufactures and sells a single product called a Ret. Operating at capacity, the company can produce and sell 48,000 Rets per year. Costs associated with this level of production and sales are given below: Unit $ 25 Direct materials Direct labor Variable manufacturing overhead Fixed manufacturing overhead Variable selling expense Fixed selling expense Total cost On uw ou Total $ 1,200,000 384,000 144,000 240,000 96,000 288,000 $ 2,352,000 $ 49 The Rets normally sell for $54 each. Fixed manufacturing overhead is $240,000 per year within the range of 42,000 through 48,000 Rets per year. Required: 1. Assume that due to a recession, Polaski Company expects to sell only 42,000 Rets through regular channels next year. A large retail chain has offered to purchase 6,000 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 6,000 units. This machine would cost $12,000. 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 42,000 Rets through regular channels next year. The U.S. Army would like to make a one-time-only purchase of 6,000 Rets. The Army would pay a fixed fee of $1.40 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 48,000 Rets through regular channels next year. Thus, accepting the U.S. Army's order would require giving up regular sales of 6,000 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 48000 42000 6000 54 25.00 8.00 3.00 5.00 2.00 6.00 49 Answers 1) Financila Advantage (Net increase) 2) Financial Advantage (Net increase) 3) Financial Disadvantage (Net Decrease) 41160 Increase 38400 Increase 57600 Decrease

1) if Accept the retail Chain Offer at 16% Discount Price. 6000 Rets Per unit 6000 Units Sales Revenue 45.36 272160 Direct Material 25.00 150000 Direct labor 8.00 48000 Variable Manufacturing overheads 3.00 18000 Variable Selling Expenses 0.50 3000 Special Machine 12000 Net Operating income From Order 41160 Net profit Increase By 41160 1.40 2)IF Accept the US Army Order for Fixed fee of and all Manufactruing Cost will Reimburse Per unit Fixed Fee Received 1.40 Reimberse the Fixed MOH 5.00 Incremental Net profit 6000 Units 8400 30000 38400 Net profit Increase By 38400

3) IF US Army order Accepted but Operating at full capacity. At Current operating Full Capacity Levele 48000 42000 Units Sales Revnue 2592000 2268000 Direct Material 1200000 1050000 Direct labor 384000 336000 Variable Manufacturing overheads 144000 126000 Fixed Manufacturing Overheads 240000 240000 Variable Selling Expenses 96000 84000 Fixed Selling Expenses 288000 288000 Total Cost 23520002124000 Net Profit 240000 144000 38400 Increemtnal Analysis Increse in Net profit by Order Lose in profit for the Special Oder = 240000-144000 Decrease in net Profit Net Profit Will Decrase by -96000 -57600 57600