Polaski Company manufactures and sells a single product called a Ret. Operating
ID: 2559846 • Letter: P
Question
Polaski Company manufactures and sells a single product called a Ret. Operating at capacity, the company can produce and sel 40,000 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 $ 800,000 320,000 120,000 360,000 160,000 240,000 $. 50 2,000,000 9 4 The Rets normally sell for $55 each. Fixed manufacturing overhead is $360,000 per year within the range of 31,000 through 40,000 Rets per year Required: 1. Assume that due to a recession, Polaski Company expects to sell only 31,000 Rets through regular channels next year. A large retail chain has offered to purchase 9,000 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 9,000 units. This machine would cost $18,000. 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 31,000 Rets through regular channels next year The U.S. Army would like to make a one-time-only purchase of 9,000 Rets. The Army would pay a fixed fee of $1.60 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 40,000 Rets through regular channels next year. Thus, accepting the U.S. Army's order would require giving up regular sales of 9,000 Rets. Given this new information, what is the financial advantage (disadvantage) of accepting the U.S. Army's special order? 2. Financial advantageExplanation / Answer
1) New contribution margin Selling price 55*(1-.16) 46.2 less :Variable expense Direct materials 20 Direct labor 8 variable manufacturing overhead 3 variable selling expense (4*25%) 1 total variable expense 32 -32 New contribution margin 14.2 total contribution margin (9000*14.2)= 127800 less :cost of machine -18,000 Net income 109800 Net profit increases by 109,800 2) Fixed fee 1.6 Fixed manufacturing overhead reimbursed 9 total 10.6 total contribution 9000*10.60 = 95400 Net profit increase by 95,400 (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 8 variable manufacturing overhead 3 variable selling expense 4 total variable expense 35 -35 New contribution margin 20 contribution lost (9000*20) -180000 income from Army order 95,400 Net loss -84600 Net profit will decrease by -84600 financial disadvantage 84,600