Polaski Company manufactures and sells a single product called a Ret. Operating
ID: 2587673 • 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: Unit Total Direct materials Direct labor Variable manufacturing overhead Fixed manufacturing overhead Variable selling expense Fixed selling expense Total cost 15 540,000 288,000 108,000 180, 000 72,000 216,000 1,404,000 S 39 The Rets normally sell for $44 each. Fixed manufacturing overhead is $180,000 per year within the range of 29,000 through 36,000 Rets per year Requirec 1. Assume that due to a recession, Polaski Company expects to sell only 29,000 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 29,000 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 $1.20 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 varlable 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 7,000 Rets. Given this new information, what is the financial advantage (disadvantage) of accepting the U.S. Army's special order? 1· Financial advantage 2.Explanation / Answer
Answer:
Amount $
Net increase in profits by
59220
Net increase in profits by
43400
Net Decrease in profits
-68600
Working notes for the answer:
W.N.1
Calculation of the impact on profits next year if this special order is accepted
Incremental Revenue = 7000*(44 * (1-16%))
258720
Less:
Direct Material Cost = 7000*15
-105000
Direct Labor Cost =7000*8
-56000
Variable Manufacturing Cost =7000*3
-21000
Variable Selling Expenses =7000*2*(1-75%)
-3500
Cost of Special Machine
-14000
Net increase in profits
59220
W.N.2
Calculation of the impact on profits next year if this special order is accepted
Incremental Revenue = 7000*1.2
8400
Additional recovery of Fixed manufacturing overhead = 7000*5
35000
Net increase in profits
43400
W.N.3
Incremental Revenue = 7000*1.2
8400
Additional recovery of Fixed manufacturing overhead = 7000*5
35000
Less: Loss on contribution on regular units
=7000*(44-15-8-3-2)
-112000
Net Decrease in profits
-68600
Amount $
Net increase in profits by
59220
Net increase in profits by
43400
Net Decrease in profits
-68600