Question

In: Accounting

Polaski Company manufactures and sells a single product called a Ret. Operating at capacity, the company...

Polaski Company manufactures and sells a single product called a Ret. Operating at capacity, the company can produce and sell 40,000 Rets per year. Costs associated with this level of production and sales are given below:

Unit Total
Direct materials $ 20 $ 800,000
Direct labor 10 400,000
Variable manufacturing overhead 3 120,000
Fixed manufacturing overhead 5 200,000
Variable selling expense 4 160,000
Fixed selling expense 6 240,000
Total cost $ 48 $ 1,920,000

The Rets normally sell for $53 each. Fixed manufacturing overhead is $200,000 per year within the range of 33,000 through 40,000 Rets per year.

Required:

1. Assume that due to a recession, Polaski Company expects to sell only 33,000 Rets through regular channels next year. A large retail chain has offered to purchase 7,000 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 7,000 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? (Round your intermediate calculations to 2 decimal places.)

2. Refer to the original data. Assume again that Polaski Company expects to sell only 33,000 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 $2.00 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 40,000 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?

Solutions

Expert Solution

1) New contribution margin
Selling price   53*(1-.16) 44.52
less :Variable expense
Direct materials 20
Direct labor 10
variable manufacturing overhead 3
variable selling expense (4*25%) 1
total variable expense 34 -34
New contribution margin 10.52
total contribution margin (7000*10.52) 73640
less :cost of machine -14,000
Net income 59640
financail advantage 59,640
2) Fixed fee 2
Fixed manufacturing overhead reimbursed 5
total 7
total contribution   7000*7 49000
financial advantage 49,000
(note though VMOH is also reimbursed ,it is not considered as the same amount
will be incurred in production also)
3) original contribution margin per unit
Selling price   53
less :Variable expense
Direct materials 20
Direct labor 10
variable manufacturing overhead 3
variable selling expense 4
total variable expense 37 -37
New contribution margin 16
contribution lost (7000*16) -112000
income from Army order 49,000
Net loss -63000
Net profit will decrease by -63000
financial disadvantage 63,000 answer

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