Polaski Company manufactures and sells a single product called a Ret. Operating
ID: 2536126 • 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:
The Rets normally sell for $46 each. Fixed manufacturing overhead is $180,000 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?
3. Assume the same situation as described in (2) above, except that the company expects to sell 36,000 Rets through regular channels next year. Thus, accepting the U.S. Army’s order would require giving up regular sales of 6,000 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 $ 540,000 Direct labor 10 360,000 Variable manufacturing overhead 3 108,000 Fixed manufacturing overhead 5 180,000 Variable selling expense 2 72,000 Fixed selling expense 6 216,000 Total cost $ 41 $ 1,476,000Explanation / Answer
ans 1 Revenue from special order (6000*46*84%) 231840 Less: variable cost Unit cost per unit Direct materials 6000 15 90000 Direct labor 6000 10 60000 Variable manufacturing overhead 6000 3 18000 Variable selling expense 6000 0.5 3000 Total variable cost 171000 Special cost of machine 12000 Financial advantage 48840 ans 2 Total cost of production would be paid Unit cost per unit Direct materials 6000 15 90000 Direct labor 6000 10 60000 Variable manufacturing overhead 6000 3 18000 Fixed manufacturing overhead 6000 5 30000 Total cost of production would be paid 198000 Add: fixed fees ( 6000 1.4 8400 Total revenue 206400 less: Incremental cost 162000 6000*(14+10+3) Financial advantage 44400 ans 3 Total revenue from US army 206400 From regular channels (6000*46) 276000 Net decrease -69600 Less: variable expense avoided 12000 (6000*2) Financial disadvantage accepting US Army order -57600