Polaski Company manufactures and sells a single product called a Ret. Operating
ID: 2564822 • 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: Unit Total Direct materials Direct labor Variable manufacturing overhead Fixed manufacturing overhead Variable selling expense Fixed selling expense Total cost $ 20 920,000 368,000 138,000 414,000 184,000 276,000 $ 50 2,300,000 4 The Rets normally sell for $55 each. Fixed manufacturing overhead is $414,000 per year within the range of 39,000 through 46,000 Rets per year. Required: 1. Assume that due to a recession, Polaski Company expects to sell only 39,000 Rets through regular channels next year. A large retail . chain has offered to purchase 7,000 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 7,000 units. This machine would cost $14,000. 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 39,000 Rets through regular channels next year The U.S. Army would like to make a one-time-only purchase of 7,000 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 46,000 Rets through regular channels next year. Thus, accepting the U.S. Army's order would require giving up regular sales of 7,000 Rets. Given this new information, what is the financial advantage (disadvantage) of accepting the U.S. Army's special order?Explanation / Answer
1 Regular Selling Price 55 Discount demanded 16% Price after 16% discount 46.2 Revenue 323400 (7000*46.2) less: Direct materials 140000 =7000*20 Direct labour 56000 =7000*8 Variable manufacturing oh 21000 =7000*3 Vraible selling overhead 7000 =4*25%*7000 Additional machine 14000 Financial benefit 85400 3 Revenue in case of 46000 units throughregular channel 385000 =7000*55 If sold to army Revenue 11200 =7000*1.6 Cost associated reimbursement 322000 =(50-4)*7000 333200 (11200+322000) Financial disadvantage 51800 (385000-333200)