Problem 12-22 Accept or Reject a Special Order [LO12-4] Polaski Company manufact

Question

Problem 12-22 Accept or Reject a Special Order [LO12-4] Polaski Company manufactures and sells a single product called a Ret. Operating at capacity, the company can produce and sell 42,000 Rets per year. Costs associated with this level of production and sales are given below: Unit Total s 20 $84000o Direct materials Direct labor Variable manufacturing overhead Fixed manufacturing overhead Variable selling expense Fixed selling expense 10 420,000 3 126,000 7 294,000 168,000 6 252,000 4 50 2,100,000 Total cost

Explanation / Answer

1) New contribution margin Selling price   55*(1-.16) 46.2 less :Variable expense Direct materials 20 Direct labor 10 variable manufacturing overhead 3 variable selling expense (4*25%) 1 total variable expense 34 -34 New contribution margin 12.2 total contribution margin (6000*12.20) 73200 less :cost of machine -12,000 Net income 61200 financail advantage 61,200 net profit increase by $61200 2) Fixed fee 1.4 Fixed manufacturing overhead reimbursed 7 total 8.4 total contribution   6000*8.4 50400 financial advantage 50,400 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   55 less :Variable expense Direct materials 20 Direct labor 10 variable manufacturing overhead 3 variable selling expense 4 total variable expense 37 -37 New contribution margin 18 contribution lost (6000*18) -108000 income from Army order 50,400 Net loss -57600 Net profit will decrease by -57600 financial disadvantage 57,600 answer net profit decreases by $57,600

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