Problem 12-22 Special Order Decisions [L012-4] Polaski Company manufactures and
ID: 2587262 • Letter: P
Question
Problem 12-22 Special Order Decisions [L012-4] Polaski Company manufactures and sells a single product called a Ret. Operating at capacity, the company can produce and sell 44,000 Rets per year. Costs associated with this level of production and sales are given below Unit Direct materials Direct labor Variable manufacturing overhead $15 660,eee 352,0ee 132,800 308,e88 88,800 264,8e8 Variable selling expense Fixed selling expense Total cost $41 1,884,e00 The Rets normally sell for $46 each. Fixed manufacturing overhead is $308,000 Rets per year per year within the range of 38,000 through 44,000 Required: 1. Assume that due to a recession, Polaski Company expects to sell only 38,000 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 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 the special order? 2. Refer to the original data. Assume again that Polaski Company expects to sell only 38,000 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 3. Assume the same situation as described in (2) above, except that the company expects to sell 44,000 Rets through regular channels next yeor. Thus, accepting the U.S. Army's order would require giving up regular sales of 6,000 Rets. Given this new is the financial advantage (disadvantage) of accepting the U.S. Army's special order? accepting the U.S. Army's special order? whatExplanation / Answer
1) New contribution margin Selling price 46*(1-.16) 38.64 less :Variable expense Direct materials 15 Direct labor 8 variable manufacturing overhead 3 variable selling expense (2*25%) 0.5 total variable expense 26.5 -26.5 New contribution margin 12.14 total contribution margin (6000*12.14)= 72840 less :cost of machine -12,000 Net income 60840 Net profit increases by 60,840 2) Fixed fee 1.4 Fixed manufacturing overhead reimbursed 7 total 8.4 total contribution 6000*8.40 = 50400 Net profit increase 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 46 less :Variable expense Direct materials 15 Direct labor 8 variable manufacturing overhead 3 variable selling expense 2 total variable expense 28 -28 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