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				Total
Direct materials	$	20			$	720,000
Direct labor		10				360,000
Variable manufacturing overhead		3				108,000
Fixed manufacturing overhead		9				324,000
Variable selling expense		2				72,000
Fixed selling expense		6				216,000
Total cost	$	50			$	1,800,000

The Rets normally sell for $55 each. Fixed manufacturing overhead is $324,000 per year within the range of 29,000 through 36,000 Rets per year.

Required:

1. Assume that due to a recession, Polaski Company expects to sell only 29,000 Rets through regular channels next year. A large retail chain has offered to purchase 7,000 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 7,000 units. This machine would cost $14,000. 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 29,000 Rets through regular channels next year. The U.S. Army would like to make a one-time-only purchase of 7,000 Rets. The Army would pay a fixed fee of $1.60 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 36,000 Rets through regular channels next year. Thus, accepting the U.S. Army’s order would require giving up regular sales of 7,000 Rets. Given this new information, what is the financial advantage (disadvantage) of accepting the U.S. Army's special order?

Answer 1

1.FIXED COST are constant they will not change with acceptance of order so they are irrelevant

sales	323400	55-16%=46.2*7000
less relevant costs
direct material	140000	20*7000
labor	70000	10*7000
variable manufacturing overhead	21000	3*7000
variable selling expenses	3500	2*25%*7000
special machine	14000
total costs	248500
Net increase in income	74900$
financial advantage of accepting order is 74900$

2.

reimbursement	42	[20+10+3+9]
fixed fee	1.60
sales price	43.6	42+1.6
Less: variable costs relevant	33	[20+10+3]
net increase in profit per unit	10.6	[42+1.60-33]
Net total increase in profit	74200$	10.6*7000
financial advantage is 74200$

3.

loss of regular sales	385000	[7000*55]
sales to Army	305200	[7000*43.6]
net loss of sales	79800	[385000-305200]
Less:
savings in variable selling expense if sold to army	14000	[7000*2$]
net disadvantage	65800$	[79800-14000]