Polaski Company manufactures and sells a single product called a Ret. Operating
ID: 2600586 • Letter: P
Question
Polaski Company manufactures and sells a single product called a Ret. Operating at capacity, the company can produce and sell 30,000 Rets per year. Costs associated with this level of production and sales are given below: Unit s 25 10 Total Direct materials Direct labor Variable manufacturing overhead Fixed manufacturing overhead Variable selling expense Fixed selling expense Total cost $750,000 300,000 90,000 270,000 120,000 180,000 $1,710,000 6 S 57 The Rets normally sell for $62 each. Fixed manufacturing overhead is $270,000 per year within the range of 20,000 through 30,000 Rets per year Required: 1. Assume that due to a recession, Polaski Company expects to sell only 20,000 Rets through regular channels next year. A large retail chain has offered to purchase 10,000 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 10,000 units. This machine would cost $20,000. 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 20,000 Rets through regular channels next year The U.S. Army would like to make a one-time-only purchase of 10,000 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 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 30,000 Rets through regular channels next year. Thus, accepting the U.S. Army's order would require giving up regular sales of 10,000 Rets. Given this new information, what is the financial advantage (disadvantage) of accepting the U.S. Army's special order?Explanation / Answer
Solution 1:
Therefore company should accept the special order.
Solution 2:
Polaski compnay cost of production per unit (Variable + Fixed) = $25 + $10 + $3 + $9 = $47
As US army is paying fixed fee of $1.20 per ret and reimburse cost of production associated with units therefore
Offered price of US army = $47 + $1.20 = $48.20 per unit
As fixed production & Selling cost is unavoidable whether company should accept US army order or not therefore same will not be considered for financial advantage against this order
Therefore company will get offered price of $48.20 per unit and incur a variable cost of $38 per unit as variable selling expense is not involved
Financial advantage = 10000 * ($48.20 - $38) = $102,000
Solution 3:
Therefore, there is additional loss of $98,000 if company accept US Army special order.
Financial advantage (disadvantage) of special order of 1000 Rets from Retail chain Particulars Amount Selling price per unit ($62*84%) $52.08 Revenue (10000*$52.08) (A) $520,800.00 Cost: Direct Material (10000 * $25) $250,000.00 Direct Labor (10000 * $10) $100,000.00 Variable manufacturing overhead (10000*$3) $30,000.00 Variable Selling Expense (10000*4*25%) $10,000.00 Special Machine Cost $20,000.00 Total Cost (B) $410,000.00 Net Income (A-B) $110,800.00