Polaski Company manufactures and sells a single product called a Ret. Operating
ID: 2592176 • 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 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 92,000 276,000 $48 2,208,000 The Rets normally sell for $53 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 7000 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 7000 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 $1.80 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 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? 2. 3. K Prev 5 of7 Next >Explanation / Answer
Income statement if 46000 Units sold Amount in $ Per Unit Total Sales 53 2438000 less: Cost of goods sold Direct materils 20 920000 Direct Labour 8 368000 variable manufacturing Expenses 3 138000 variable selling Expenses 2 92000 Fixed selling Expenses (46000*$6) 276000 Fixed manufacturing Ove head (46000*$9) 414000 2208000 Operating Profit 230000 Requirement 1 Incremental Profit if Special order accepted (7000) Incremental Sales (7000*$53*(100%-16%) 311640 Less: Variable cost Direct materils (7000*$20) 140000 Direct Labour (7000*$8) 56000 variable manufacturing Expenses (7000*$3) 21000 variable selling Expenses(7000*$2*25%) 3500 Cost of Special machine 14000 234500 Incremental Profit if Special order accepted (7000) 77140 Requirement 2 Incremenatl Income =7000 Units* $1.80 =$12600 Fixed costs reimbusred =Fixed manufacturng + Fixed selling Expenses =($9+$6)*7000 =105000 Total Incremental income =$12600+$105000 =$117600 Requirement 3 if the company accets sepcial order , it will lose the reqular income generated from regular channels Profit if 46000 Units sold through regulars channals =$230,000 if the sepcial order accepted ,then 39000 units regular, 7000 special order Amount in $ Per Unit Total Sales 36000 53 2067000 revenue from 7000 unit (7000 *$1.8) $1.8 12600 2079600 less: Cost of goods sold for 39000 Units Direct materils 20 780000 Direct Labour 8 312000 variable manufacturing Expenses 3 117000 variable selling Expenses 2 78000 less: Cost of goods sold for 7000 Units variable expenses are incurred and Reimbused 0 Fixed Manufacturing & Fixed Selling Expenses recoverd ($9+$6)*7000 =105000 -105000 Fixed selling Expenses (46000*$6) 276000 Fixed manufacturing Ove head (46000*$9) 414000 1872000 Profit for special order 7000 and 39000 regulars channals 207600 Financial Advantage /(Disadvantage) of accepting order Profit if Special order accepted $207600 profit if Not accepted $230000 Financial Advantage /(Disadvantage) of accepting order ($22400) 1. Financial Advantage $77140 2 Financial Advantage $117600 3. Financial Disadvantage ($22400)