Question

Polaski Company manufactures and sells a single product called a Ret. Operating at capacity, the company can produce and sell 44,000 Rets per year. Costs associated with this level of production and sales are given below: Direct materials Direct labor Variable manufacturing overhead Fixed manufacturing overhead Variable selling expense Fixed selling expense Total cost Unit $ 20 10 3 7 2 6 $ 48 Total $ 880,000 440,000 132,000 308,000 88,000 264,000 $ 2,112,000 The Rets normally sell for $53 each. Fixed manufacturing overhead is $308,000 per year within the range of 36,000 through 44,000 Rets per year. Required: 1. Assume that due to a recession, Polaski Company expects to sell only 36,000 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 36,000 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 44,000 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?

Answer 1

Important Note:- Fixed Cost is sunk cost which means no relevant cost for decision making.

Information
Variable Cost /unit
Direct Materials		$             20
Direct Labour		$             10
Variable Manu OH		$               3
Variable Manu. Cost		$             33
Variable Selling exp.		$               2
Total Variable Cost/unit		$             35
Fixed Cost at 44,000 level
Manufacturing OH		$               7	$     3,08,000
Selling expense		$               6	$     2,64,000
Sell Price		$             53
Answer to question no 1
Sales price (53*84%)		$         44.52
Less;- Variable Manu. Cost		$         33.00
Less:- Variable Selling Exp (2 * 25%)		$           0.50
Contribution/unit		$        11.02
Units Sold		8000.00
Total Contribution		$   88,160.00
Less:- Machine cost		$   16,000.00
Financial Advantage		$ 72,160.00
Answer to question no 2
Variable Manu. Cost		$         33.00
Variable Selling cost		$              -
Total Variable Cost		$        33.00
Sales Price
Total Variable Cost		$         33.00
Add;- Fixed Manu. OH		$           7.00
		$        40.00
Contribution per unit		$           7.00
Units Sold		8000.00
Financial Advantage		$ 56,000.00
Note:- we don't know fixed fee paid to government or company
Answer to question no 3
Normal Sales Price		$         53.00
Total Variable Cost		$         35.00
Contribution per unit (Normal Sale)		$        18.00
Units Sold		8000.00
Contribution per unit (Sale to U.S. Army)		$          7.00
Financial Disadvantage		$ 88,000.00
(18-7) * 8000