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 640.000 192.000 96.000 224.000 64.000 192.000 1.408.000 $ The Rets normally sell for $49 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 7000 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 7000 Rets. The Army would pay a fixed fee of $1.80 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 32,000 Rets through regular channels next year. Thus, accepting the U.S. Army's order would require giving up regular sales of 7000 Rets. Given this new information, what is the financial advantage (disadvantage) of accepting the U.S. Army's special order?

Answer 1

1	Financial Advantage / Increase in profit	$ 32,620
2	Financial Advantage / Increase in profit	$ 61,600
3	Financial (Disdvantage) / (Decrease in profit )	$ ( 64,400)
	Calculations :-
1	Statement showing Financial Advantage / ( Disadvantage ) of accepting the special order
		Units	Per Unit ( $ )	Total ( $ )
	Incremental Revenue	7,000	41.16	288,120
	Less :
	Direct Material Cost	7,000	20	( 175,000)
	Direct Labor Cost	7,000	6	( 42,000 )
	Variable Manufacturing Cost	7,000	3	( 21,000 )
	Variable Selling expenses	7,000	0.5	( 3,500 )
	Cost of Special Machine			( 14,000)
	Net Increase / ( Decrease ) in Profits			32,620
	Increase in Profit by $ 50,260
*	Normal per unit selling Price = $ 49
	Special order per unit selling Price = $ 49 * ( 1 - 16 % ) = $ 41.16
**	Normal per unit variable selling expenses = $ 2
	After Special order per unit variable selling expenses = $ 2 * ( 1- 75 % ) = $ 0.50
2	Statement showing Financial Advantage / ( Disadvantage ) of accepting the U.S Army's special order
	Incremental Revenue ( 7,000 * $ 1.80 )	$ 12,600
	Additional Recovery of Fixed Manufacturing Overhead     ( 7,000 * $ 7 )	$ 49,000
	Net Increase in profit	$ 61,600
3	If Sold to U.S Army :-
	Incremental Revenue ( 7,000 * $ 1.80 )	$ 12,600
	Additional Recovery of Fixed Manufacturing Overhead     ( 7,000 * $ 7 )	$ 49,000
	Total	$ 61,600
	If Sold through Regular Channel :-
	Loss on Contribution on regular units = 7,000 * ( $ 49 - $ 20 - $ 6 - $ 3 - $ 2 ) = $ 126,000
	Financial Advantage / ( disadvantage ) of accepting U.S Army's proposal = $ ( 61,600 - 126,000 ) = $ ( 64,400 )
	Financial ( Disadvantage ) of accepting U.S Army's proposal = $ ( 64,400 )