Polaski Company manufactures and sells a single product called a Ret. Operating
ID: 2587118 • 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 $ 20 920,000 368,000 138,000 322,000 92,000 276,000 $46S 2,116,000 7 The Rets normally sell for $51 each. Fixed manufacturing overhead is $322,000 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 $1.40 per Ret, and it would reimburse Polaski Company for all costs of production (variable and fixed) associated with the units. Because the army would pick up the Rets with its own trucks, there would be no variable selling expenses associated with this order. What is the financial advantage (disadvantage) of accepting the U.S. Army's special order? 3. Assume the same situation as described in (2) above, except that the company expects to sell 46,000 Rets through regular channels next year. Thus, accepting the U.S. Army's order would require giving up regular sales of 7,000 Rets. Given this new information, what is the financial advantage (disadvantage) of accepting the U.S. Army's special order?Explanation / Answer
Sales (no. of Rets) 46000 7000 32000 7000 32000 7000 39000 Unit ($) Total ($) Unit $ Total $ Unit $ Total $ Unit $ Total $ Unit $ Total $ Unit $ Total $ Unit $ Total $ Selling price 51 23,46,000 43 2,99,880 51 16,32,000 47.4 3,31,800 51 16,32,000 47.4 3,31,800 51 19,89,000 Direct Materials 20 9,20,000 20 1,40,000 20 6,40,000 20 1,40,000 20 6,40,000 20 1,40,000 20 7,80,000 Direct Labor 8 3,68,000 8 56,000 8 2,56,000 8 56,000 8 2,56,000 8 56,000 8 3,12,000 Variable manufacturing overhead 3 1,38,000 3 21,000 3 96,000 3 21,000 3 96,000 3 21,000 3 1,17,000 Fixed manufacturing overhead 7 3,22,000 7 49,000 7 2,24,000 7 49,000 7 2,24,000 7 49,000 7 2,73,000 Additional fixed man overhead 2 14000 - 0 - 0 - 0 - 0 - Variable selling expense 2 92,000 0.5 3,500 2 64,000 0 - 2 64,000 0 - 2 78,000 Fixed selling expense 6 2,76,000 6 42,000 6 1,92,000 6 42,000 6 1,92,000 6 42,000 6 2,34,000 Total cost 46 21,16,000 46.5 3,25,500 46 14,72,000 44 3,08,000 46 14,72,000 44 3,08,000 46 17,94,000 Operating profit 5 2,30,000 -3.66 -25,620 5 1,60,000 3.4 23800 5 1,60,000 3.4 23800 5 1,95,000 1,34,380 1,83,800 2,18,800 % Operating profit to Sales 10% 7% 9% 9% 1 The operating profit to sales ratio reduces with this option. The operating profits on the deal is negative, so it is not viable, unless the company is forced not to reduce capacity. 2 Although the operating profit to sales ratio is marginally lower than the original scenario, this is a viable alternative as the company is still making profits from the deal. 3 The operating profit on the Army deal is positive, overall operating profit to sales ratio is marginally lower than the original scenario. However, the company also loses margin due to the army deal, it is not worth entering into the Army deal, unless it is in addition to the 46000 Rets that they would sell through regular channels (assuming capacity is available to produce the same).