Question

Polaski Company manufactures and sells a single product called a Ret. Operating at capacity, the company can produce and sell 32,000 Rets per year. Costs associated with this level of production and sales are given below: Unit $ 20 Direct materials Direct labor Variable manufacturing overhead Fixed manufacturing overhead Variable selling expense Fixed selling expense Total cost Total $ 640,000 256,000 96,000 224,000 64,000 192,000 $ 1,472,000 $ 46 The Rets normally sell for $51 each. Fixed manufacturing overhead is $224,000 per year within the range of 25,000 through 32,000 Rets per year. Required: 1. Assume that due to a recession, Polaski Company expects to sell only 25,000 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 25,000 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 $2.00 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?

Answer 1

32000 25000 7000 51 Total Capacity Current Operating Level Special Order Selling Price Direct Material Direct labor Variable Manufacturing overheads Fixed Manufacturing Overheads Variable Selling Expenses Fixed Selling Expenses Total Cost 20.00 8.00 3.00 7.00 2.00 6.00 46 Answers 1) Financila Advantage (Net increase) 2) Financial Advantage (Net increase) 3) Financial Disadvantage (Net Decrease) 65380 63000 63000

1) if Accept the retail Chain Offer at 16% Discount Price. For 7,000 rets Per unit 7000 Units Sales Revenue 42.84 299880 Direct Material 20.00 140000 Direct labor 8.00 56000 Variable Manufacturing overheads 3.00 21000 Variable Selling Expenses 0.50 3500 Special Machine 14000 Net Operating income From Order 65380 Net profit Increase By 65380 2)IF Accept the US Army Order for Fixed fee of $2.0, and all Manufactruing Cost will Reimburse Per unit 7000 Units Fixed Fee Received 2.00 14000 Reimberse the Fixed MOH 7.00 49000 Incremental Net profit 63000 Net profit Increase By 63000

3) IF US Army order Accepted but Operating at full capacity. At Current operating Full Capacity Levele 32000 25000 Units Sales Revnue 1632000 1275000 Direct Material 640000 500000 Direct labor 256000 200000 Variable Manufacturing overheads 96000 75000 Fixed Manufacturing Overheads 224000 224000 Variable Selling Expenses 640001 50000 Fixed Selling Expenses 1920001 192000 Total Cost 1472000 1241000 Net Profit 160000 34000 63000 Increemtnal Analysis Increse in Net profit by Order Lose in profit for the Special Oder 34000-160000 Decrease in net Profit Net Profit Will Decrase by -126000 -63000 63000