Polaski Company manufactures and sells a single product called a Ret. Operating
ID: 2600066 • Letter: P
Question
Polaski Company manufactures and sells a single product called a Ret. Operating at capacity, the company can produce and sell 50,000 Rets per year. Costs associated with this level of production and sales are given below:
The Rets normally sell for $50 each. Fixed manufacturing overhead is $450,000 per year within the range of 42,000 through 50,000 Rets per year.
Required:
1. Assume that due to a recession, Polaski Company expects to sell only 42,000 Rets through regular channels next year. A large retail chain has offered to purchase 8,000 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 8,000 units. This machine would cost $16,000. 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 42,000 Rets through regular channels next year. The U.S. Army would like to make a one-time-only purchase of 8,000 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 50,000 Rets through regular channels next year. Thus, accepting the U.S. Army’s order would require giving up regular sales of 8,000 Rets. Given this new information, what is the financial advantage (disadvantage) of accepting the U.S. Army's special order?
irect materials $ 15 $ 750,000 Direct labor 8 400,000 Variable manufacturing overhead 3 150,000 Fixed manufacturing overhead 9 450,000 Variable selling expense 4 200,000 Fixed selling expense 6 300,000 Total cost $ 45 $ 2,250,000 Ch 12 Saved Help Polaski Company manutactures and sells a single product called a Ret. Operating at capacity, the company can produce and sell 50,000 Rets per year. Costs associated with this level of production and sales are given below: Unit s 15 Tota Direct materials Direct labor Variable manufacturing overhead Pixed manufacturing overhead Variable selling expense Fixed selling expense Total cost $ 750,000 400,000 150,000 450,000 200,000 300,000 $2,250,000 14.28 points $ 45 eBook The Rets normally sell for $50 each. Fixed manufacturing overhead is $450,000 per year within the range of 42,000 through 50,000 Rets per year Print Required: 1. Assume that due to a recession, Polaski Company expects to sell only 42,000 Rets through regular channels next year. A large retail References chain has offered to purchase 8,000 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 8,000 units. This machine would cost $16,000. 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 42,000 Rets through regular channels next yean The U.S. Army would like to make a one-time-only purchase of 8,000 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 50,000 Rets through regular channels next year. Thus, accepting the U.S. Army's order would require giving up regular sales of 8,000 Rets. Given this new information, what is the financial advantage (disadvantage) of accepting the U.S. Army's special order? 1·Financial advantage 2. nancial advantageExplanation / Answer
Answer:
1
Option
Amount $
1
Financial Advantage
146000
2
Financial Advantage
83200
3
Financial (Dis-Advantage)
-76800
Explaination to the answer:
1
Calculation of the impact on profits next year if this special order is accepted
Incremental Revenue = 8000*(50 * (1-16%))
378000
Less:
Direct Material Cost = 8000*15
-120000
Direct Labor Cost =8000*8
-64000
Variable Manufacturing Cost =8000*3
-24000
Variable Selling Expenses =8000*4*(1-75%)
-8000
Cost of Special Machine
-16000
Net increase in profits
146000
2
Calculation of the impact on profits next year if this special order is accepted
Incremental Revenue = 8000*1.4
11200
Additional recovery of Fixed manufacturing overhead = 8000*9
72000
Net increase in profits
83200
3
Incremental Revenue = 8000*1.4
11200
Additional recovery of Fixed manufacturing overhead = 8000*9
72000
Less: Loss on contribution on regular units
=8000*(50-15-8-3-4)
-160000
Net Decrease in profits
-76800
Option
Amount $
1
Financial Advantage
146000
2
Financial Advantage
83200
3
Financial (Dis-Advantage)
-76800