Polaski Company manufactures and sells a single product called a Ret. Operating
ID: 2530953 • Letter: P
Question
Polaski Company manufactures and sells a single product called a Ret. Operating at capacity, the company can produce and sell 30,000 Rets per year. Costs associated with this level of production and sales are given below:
The Rets normally sell for $50 each. Fixed manufacturing overhead is $270,000 per year within the range of 25,000 through 30,000 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 5,000 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 5,000 units. This machine would cost $10,000. 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?
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 5,000 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 30,000 Rets through regular channels next year. Thus, accepting the U.S. Army’s order would require giving up regular sales of 5,000 Rets. Given this new information, what is the financial advantage (disadvantage) of accepting the U.S. Army's special order?
Unit Total Direct materials $ 15 $ 450,000 Direct labor 8 240,000 Variable manufacturing overhead 3 90,000 Fixed manufacturing overhead 9 270,000 Variable selling expense 4 120,000 Fixed selling expense 6 180,000 Total cost $ 45 $ 1,350,000Explanation / Answer
1) New contribution margin Selling price 50*(1-.16) 42 less :Variable expense Direct materials 15 Direct labor 8 variable manufacturing overhead 3 variable selling expense (4*25%) 1 total variable expense 27 -27 New contribution margin 15 total contribution margin (5000*15) 75000 less :cost of machine -10,000 Net income 65000 financail advantage 65,000 net profit increase by $61200 2) Fixed fee 1.8 Fixed manufacturing overhead reimbursed 9 total 10.8 total contribution 5000*10.8 54000 financial advantage 54,000 net profit increases by $50,400 (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 50 less :Variable expense Direct materials 15 Direct labor 8 variable manufacturing overhead 3 variable selling expense 4 total variable expense 30 -30 New contribution margin 20 contribution lost (5000*20) -100000 income from Army order 54,000 Net loss -46000 Net profit will decrease by -46000 financial disadvantage 46,000 answer