Polaski Company manufactures and sells a single product called a Ret. Operating
ID: 2590844 • Letter: P
Question
Polaski Company manufactures and sells a single product called a Ret. Operating at capacity, the company can produce and sell 48,000 Rets per year. Costs associated with this level of production and sales are given below:
The Rets normally sell for $56 each. Fixed manufacturing overhead is $336,000 per year within the range of 39,000 through 48,000 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 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 39,000 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 $1.80 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 48,000 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?
Unit Total Direct materials $ 25 $ 1,200,000 Direct labor 8 384,000 Variable manufacturing overhead 3 144,000 Fixed manufacturing overhead 7 336,000 Variable selling expense 2 96,000 Fixed selling expense 6 288,000 Total cost $ 51 $ 2,448,000Explanation / Answer
Production Unit Amount Remarks for Understanding Original Sales 48000 56 2688000 Material cost 48000 25 1200000 Direct Labor 48000 8 384000 Variable mfg overhead 48000 3 144000 Variable Selling expense 48000 2 96000 Contribution 48000 18 864000 Fixed mfg overhead 336000 Fixed Selling expense 288000 Profit 48000 5 240000 Q1 Production Unit Amount Sales regular channel 39000 56 2184000 Retail chain sale 9000 47.04 423360 16% discount only for retain chain sales Material cost 48000 25 1200000 Direct Labor 48000 8 384000 Variable mfg overhead 48000 3 144000 Variable Selling expense regular 39000 2 78000 Regular channel sales selling expense remains Variable Selling expense retail chain 9000 0.5 4500 Sales commission saved on retain chain sales. However other selling expense remains Contribution 48000 16.60125 796860 Fixed mfg overhead 336000 Fixed Selling expense 288000 Engraving machine cost 18000 Since no alternate use to be fully absorbed as cost Profit 48000 3.22625 154860 Financial Disadvantage -85140 Q2 Production Unit Amount Sales regular channel 39000 56 2184000 Army Sale 9000 1.8 16200 Fee only to be considered as revenue Material cost 48000 25 1200000 Refund from army -9000 25 -225000 Direct Labor 48000 8 384000 Refund from army -9000 8 -72000 Variable mfg overhead 48000 3 144000 Refund from army -9000 3 -27000 Variable Selling expense regular 39000 2 78000 Contribution 48000 14.9625 718200 Fixed mfg overhead 336000 This will not be refunded since this remains same even if company sells 39k units Fixed Selling expense 288000 No provision to refund this Profit 48000 1.9625 94200 Financial Disadvantage -145800 Q3 Production Unit Amount Sales regular channel 39000 56 2184000 Army Sale 9000 1.8 16200 Material cost 48000 25 1200000 Refund from army -9000 25 -225000 Direct Labor 48000 8 384000 Refund from army -9000 8 -72000 Variable mfg overhead 48000 3 144000 Refund from army -9000 3 -27000 Variable Selling expense regular 39000 2 78000 Contribution 48000 14.9625 718200 Fixed mfg overhead 336000 Reimbursement from army -63000 Note this refund. Since the company expects sales of 48k units this can be claimed Fixed Selling expense 288000 Profit 48000 3.275 157200 Financial Disadvantage 2340