Question

Polaski Company manufactures and sells a single product called a Ret Operating at capacity, the company can produce and sell 36.000 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 3 7 4 6 Total $ 9ee, eee 288,000 188, eee 252, eee 144,000 216,080 $ 1,908,000 $ 53 The Rets normally sell for $58 each. Fixed manufacturing overhead is $252,000 per year within the range of 28,000 through 36,000 Rets per year. Required: 1. Assume that due to a recession, Polaski Company expects to sell only 28.000 Rets through regular channels next year . A large retail chain has offered to purchase 8.000 Rets of 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 28,000 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 $1.40 per Ret, and it would reimburse Polaski Company for all costs of production (vartable 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 36,000 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 advantage (disadvantage) of accepting the US Army's special order? 1 2 3.

Answer 1

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Polaski
Particulars	Details	Amount	Price per unit
No. of units produced	36,000.00
Sell price per unit			58.00	A
Direct Material		900,000.00	25.00
Direct Labor		288,000.00	8.00
Variable Manufacturing overhead		108,000.00	3.00
Variable selling expense		144,000.00	4.00	C
Total Variable cost per unit			40.00
Contribution per unit			18.00	G
Fixed Manufacturing overhead		252,000.00	7.00
Fixed selling expense		216,000.00	6.00
Total Fixed cost per unit			13.00

Current Scenario
Units Sold	28,000.00
Contribution earned		504,000.00
Less:
Fixed Manufacturing overhead		252,000.00
Fixed selling expense		216,000.00
Net Profit		36,000.00

Situation 1- Offer of Retail Chain
Reduction in Sell price by	16%
Reduction in Sell price per unit	9.28		B=A*16%
Reduction in Variable selling expense	75%
Reduction in Variable selling expense	3.00		D=C*75%
Revised Sell price per unit		48.72	E=A-B
Less:
Direct Material		25.00
Direct Labor		8.00
Variable Manufacturing overhead		3.00
Variable selling expense		1.00	F=C-D
Total Variable cost per unit		37.00
Contribution per unit		11.72
No. of Units		8,000.00
Total Contribution		93,760.00
Less: Cost of special machine		16,000.00
Net income		77,760.00

Conclusion: By selling the remaining 8,000 units Polaski Company can earn an additional profit $ 77,760. So they should accept this project.

Note: Fixed manufacturing and selling expenses are sunk cost and they should not be considered for this order.

Situation 2- US Army
Fixed Fee per unit	1.40
Fixed manufacturing overhead per unit	7.00
Net received per unit	8.40
No. of Units	8,000.00
Total received	67,200.00

Conclusion: By selling the remaining 8,000 units to US army Polaski Company can earn an additional profit $ 67,200. So they should accept this project.

Situation 3- US Army
Particulars	Regular channel	U.S Army
Units Sold	36,000.00	28,000.00	H
Contribution earned	648,000.00	504,000.00	I=H*G
Less:
Fixed Manufacturing overhead	252,000.00	252,000.00
Fixed selling expense	216,000.00	216,000.00
Net Income	180,000.00	36,000.00
Add: Total received from US Army		67,200.00	Calculated in Situation 2 above
Net Profit	180,000.00	103,200.00
Variance		76,800.00

Conclusion: If Polaski company is able to sell all its units through regular channel then it should not sell to US Army. Because it will earn $ 76,200 less if it will sell to US Army.