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

We need to do the incremental benefit vs incremental cost analysis

Part (1)

Sale price = 49 x (1 - 16% discount) = $ 41.16 / unit; Number of units = 7,000

Variable selling expense per unit = 2 x (1 - 75%) = 0.50 / unit

Fixed manufacturing cost and fixed selling expenses have to be incurred even if does not produce additional 7,000 units over 25,000 rets. Hence, they are just allocations to each unit and not relevant to decision making.

The entire machine cost needs to be depreciated because there is uncertainty whether the store will buy again in future.

	Per Unit	No. of units	Total
Revenue	41.16	7,000	288,120
Incremental Costs
Direct materials	20.00	7,000	140,000
Direct labor	6.00	7,000	42,000
Variable manufacturing overhead	3.00	7,000	21,000
Fixed manufacturing overhead	-	7,000	-
Variable selling expense	0.50	7,000	3,500
Fixed selling expense	-	7,000	-
Machine cost			14,000
Total Cost			220,500
Financial advantage / (disadvantage)			67,620

Hence, please enter 67,620 in the first answer box.

Part (2)

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. Hence, the equivalent sale price = all the fixed & variable cost of production (only and not selling costs) + 1.80 = 20 + 6 + 3 + 7 + 1.8 = $ 37.8 per unit

	Per Unit	No. of units	Total
Revenue	37.8	7,000	264,600
Incremental Costs
Direct materials	20.00	7,000	140,000
Direct labor	6.00	7,000	42,000
Variable manufacturing overhead	3.00	7,000	21,000
Fixed manufacturing overhead	-	7,000	-
Variable selling expense	-	7,000	-
Fixed selling expense	-	7,000	-
Total Cost			203,000
Financial advantage / (disadvantage)			61,600

Please enter 61,600 in the second answer box

Part (3)

If it was normal order, the financial advantage will be as shown in the table below:

	Per Unit	No. of units	Total
Revenue	49	7,000	343,000
Incremental Costs
Direct materials	20.00	7,000	140,000
Direct labor	6.00	7,000	42,000
Variable manufacturing overhead	3.00	7,000	21,000
Fixed manufacturing overhead	-	7,000	-
Variable selling expense	2.00	7,000	14,000
Fixed selling expense	-	7,000	-
Machine cost			14,000
Total Cost			231,000
Financial advantage / (disadvantage)			112,000

However, if we execute army's order, the financial advantage was calculated as $  61,600 in part (2)

Hence, financial advantage / (disadvantage) = 61,600 - 112,000 = - $  50,400

So, there is a disadvantage of $ 50,400

Hence, please enter 50,400 in the third answer box.