Polaski Company manufactures and sells a single product called a Ret. Operating
ID: 2430127 • Letter: P
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 Direct labor Variable manufacturing overhead Fixed manufacturing overhead Variable selling expense Fixed selling expense Total cost $ 20 720,000 288,000 108,000 324,000 72,000 216,000 $1,728,000 The Rets normally sell for $53 each. Fixed manufacturing overhead is $324,000 per year within the range of 30,000 through 36,000 Rets per year Required: 1. Assume that due to a recession, Polaski Company expects to sell only 30,000 Rets through regular channels next year. A large retail chain has offered to purchase 6,000 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 6,000 units. This machine would cost $12,000. 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 30,000 Rets through regular channels next year. The U.S. Army would like to make a one-time-only purchase of 6,000 Rets. The Army would pay a fixed fee of $1.40 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?Explanation / Answer
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Ans 1 financial advantage Sales by special order (6000*53*84%) 267120 Less: relevant cost Direct material (20*6000) 120000 Direct labor (8*6000) 48000 Variable Manufacturing overhead (3*6000) 18000 Variable selling exp (2*6000*25%) 3000 Machine cost 12000 201000 Financial advantage of accepting special order 66120 ans ans 2 Fixed fees (1.4*6000) 8400 Add: Direct material (20*6000) 120000 Direct labor (8*6000) 48000 Variable Manufacturing overhead (3*6000) 18000 Fixed manufacturing overhead (9*6000) 54000 Total revenue 248400 Less: Incremental cost (31*6000) 186000 Financial advantage of accepting special order 62400 ans 3 Total revenue from Army 248400 Sales from regular channel (53*6000 318000 Net decrease in revenue -69600 Less: variable selling expenses avoided (2*6000) 12000 Net decrease -57600 ans Financial advantage of accepting special order 66120 Financial advantage of accepting special order 62400 Financial disadvantage of accepting special order -57600