Polaski Company manufactures and sells a single product called a Ret. Operating
ID: 2437087 • Letter: P
Question
Polaski Company manufactures and sells a single product called a Ret. Operating at capacity, the company can produce and sell 46,000 Rets per year. Costs associated with this level of production and sales are given below:
The Rets normally sell for $47 each. Fixed manufacturing overhead is $230,000 per year within the range of 36,000 through 46,000 Rets per year.
1. Refer to the original data. Assume again that Polaski Company expects to sell only 36,000 Rets through regular channels next year. The U.S. Army would like to make a one-time-only purchase of 10,000 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?
2. Assume the same situation as described in (2) above, except that the company expects to sell 46,000 Rets through regular channels next year. Thus, accepting the U.S. Army’s order would require giving up regular sales of 10,000 Rets. Given this new information, what is the financial advantage (disadvantage) of accepting the U.S. Army's special order?
Unit Total Direct materials $ 20 $ 920,000 Direct labor 6 276,000 Variable manufacturing overhead 3 138,000 Fixed manufacturing overhead 5 230,000 Variable selling expense 2 92,000 Fixed selling expense 6 276,000 Total cost $ 42 $ 1,932,000Explanation / Answer
2) Fixed fee 1.4 Fixed manufacturing overhead reimbursed 5 total 6.4 total contribution 10000*6.4 64000 financial advantage 64,000 (note though VMOH is also reimbursed ,it is not considered as the same amount will be incurred in production also) 3) original contribution margin per unit Selling price 47 less :Variable expense Direct materials 20 Direct labor 6 variable manufacturing overhead 3 variable selling expense 2 total variable expense 31 -31 New contribution margin 16 contribution lost (10000*16) -160000 income from Army order 64,000 Net loss -96000 Net profit will decrease by -96000 financial disadvantage 96,000 answer