Question

Polaski Company manufactures and sells a single product called a Ret. Operating at capacity, the company can produce and sell 42,000 Rets per year. Costs associated with this level of production and sales are given below Total Unit Direct materials $20 $ 840,000 Direct labor 8 336,000 Variable manufacturing overhead Fixed manufacturing overhead Variable selling expense 126,000 378,000 9 4 168,000 Fixed selling expense 6 252,000 Total cost 50 2,100,000 The Rets normally sell for $55 each. Fixed manufacturing overhead is $378,000 per year within the range of 34,000 through 42,000 Rets per year. Required: 1. Assume that due to a recession, Polaski Company expects to sell only 34,000 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 34,000 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 $1.20 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 42,000 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? 1 2. 3.

Answer 1

Total Capacity Current Operating Level Special Order Selling Price 42000 34000 8000 55 Direct Material 20.00 8.00 Direct labor Variable Manufacturing overheads Fixed Manufacturing Overheads Variable Selling Expenses 3.00 9.00 4.00 Fixed Selling Expenses Total Cost 6.00 50 Answers 1) Financila Advantage 2) Financial Advantage 3) Financial Disadvantage 97600 81600 78400

1) if Accept the retail Chain Offer at 16% Discount Price. For 8,000 rets Per unit 8000 Units Sales Revenue Direct Material Direct labor Variable Manufacturing overheads Variable Selling Expenses Special Machine Net Operating income From Order 46.20 369600 160000 20.00 8.00 64000 3.00 24000 1.00 8000 16000 97600 Net profit Increase By 97600 2)IF Accept the US Army Order for Fixed fee of $1.20, and all Manufactruing Cost will Reimburse Per unit 8000 Units Fixed Fee Received Reimberse the Fixed MOH Incremental Net profit 1.2 9600 72000 81600 Net profit Increase By 81600

3) IF US Army order Accepted but Operating at full capacity. At Current operating Full Capacity Levele 34000 Units 42000 Sales Revnue Direct Material Direct labor Variable Manufacturing overheads Fixed Manufacturing Overheads Variable Selling Expenses Fixed Selling Expenses Total Cost 2310000 1870000 840000 680000 272000 336000 126000 102000 378000 378000 168000 136000 252000 252000 2100000 1820000 Net Profit 50000 210000 Increemtnal Analysis Increse in Net profit by Order Lose in profit for the Special Oder = (50000-210000) Decrease in net Profit 81600 -160000 -78400 Net Profit Will Decrase by 78400