Question

Polaski Company manufactures and sells a single product called a Ret. Operating at capacity, the company can produce and sell 44,000 Rets per year. Costs associated with this level of production and sales are given below:

	Unit				Total
Direct materials	$	20			$	880,000
Direct labor		8				352,000
Variable manufacturing overhead		3				132,000
Fixed manufacturing overhead		7				308,000
Variable selling expense		4				176,000
Fixed selling expense		6				264,000
Total cost	$	48			$	2,112,000

The Rets normally sell for $53 each. Fixed manufacturing overhead is $308,000 per year within the range of 35,000 through 44,000 Rets per year.

Required:

1. Assume that due to a recession, Polaski Company expects to sell only 35,000 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? (Round your intermediate calculations to 2 decimal places.)

2. Refer to the original data. Assume again that Polaski Company expects to sell only 35,000 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 $1.60 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 44,000 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?

Answer 1

1. Fixed cost remains same for all units, therefore it is not incremental expense for additional units sold.

Incremental Revenue	$     4,00,680.00	=9000*53*84%	16% discount
Incremental Expenses
Direct Material	$     1,80,000.00	=9000*20
Direct Labor	$         72,000.00	=9000*8
Variable Manufacturing Overhead	$         27,000.00	=9000*3
Variable Sellin g expenses	$           9,000.00	=9000*4*25%	75% expenses slashes
Additional Machine cost	$         18,000.00
Total Expenses	$     3,06,000.00
Incremental Profit / (Loss)	$         94,680.00

Since there is incremental profit of $94,680, there is financial advantage of $94,680 for accepting the order.

2.

Product Cost
Direct Material	$                20.00
Direct Labor	$                   8.00
Variable Manufacturing Overhead	$                   3.00
Fixed Manufacturing Overhead	$                   7.00	=308000/44000
Total Product Cost per unit	$                38.00
Fee	$                   1.60
Selling price per ret for army	$                39.60

Incremental Revenue	$     3,56,400.00	=9000*39.6
Incremental Expenses
Direct Material	$     1,80,000.00	=9000*20
Direct Labor	$         72,000.00	=9000*8
Variable Manufacturing Overhead	$         27,000.00	=9000*3
Total Expenses	$     2,79,000.00
Incremental Profit / (Loss)	$         77,400.00

Since there is incremental profit of $77,400, there is financial advantage of $77,400 for accepting the order.

3.
Since sales of $53 per unit has to be foregone for sales to be made @ $39.60 per unit, therefore therefore will be financial disadvantage to the tune of difference in sales price with adjustment to saving in variable selling expenses

Difference in Sales price	$                13.40	=53-39.6
Saving in Variable Selling Expenses	$                   4.00
Net Disadvantage per unit	$                   9.40
No of units to be sold at lower price	9000
Total Financial Disadvantage	$         84,600.00