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:

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 Total Direct materials Direct labor Variable manufacturing overhead Fixed manufacturing overhead Variable selling expense Fixed selling expense Total cost $ 800,000 320,000 120,000 200,000 160,000 240,000 $1,840,000 4 $46 The Rets normally sell for $51 each. Fixed manufacturing overhead is $200,000 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. 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 (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 40,000 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 U.S. Army's special order?

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Answer 1

Part 1

Financial advantage (disadvantage) = sales – variable costs – special machine costs = (8000*51*(1-16%))-(8000*(20+8+3+(4*(1-75%))))-16000 = 70720

Therefore,

Financial advantage

$70720

Part 2

Financial advantage (disadvantage) = reimbursement for costs of production + fixed fee – less incremental costs = (8000*(20+8+3+5))+(1.40*8000)-(8000*(20+8+3)) = 51200

Therefore,

Financial advantage

$51200

Part 3

Financial advantage (disadvantage) = from the US army – from regular channels – variable selling expense = (8000*(20+8+3+5))-(8000*51)-(8000*4) = $152000

Therefore,

Financial disadvantage

$(152000)