Question

Polaski Company manufactures and sells a single product called a Ret. Operating at capacity, the company can produce and sell 32,000 Rets per year. Costs associated with this level of production and sales are given below: Unit Total Direct materials $ 25 $ 800,000 Direct labor 10 320,000 Variable manufacturing overhead 3 96,000 Fixed manufacturing overhead 7 224,000 Variable selling expense 4 128,000 Fixed selling expense 6 192,000 Total cost $ 55 $ 1,760,000 The Rets normally sell for $60 each. Fixed manufacturing overhead is $224,000 per year within the range of 22,000 through 32,000 Rets per year. Required: 1. Assume that due to a recession, Polaski Company expects to sell only 22,000 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? (Round your intermediate calculations to 2 decimal places.) 2. Refer to the original data. Assume again that Polaski Company expects to sell only 22,000 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 $1.60 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 32,000 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?

Answer 1

Ans.1

Discounted Selling Price for special order = $60 84% = $50.40 per unit

Reduced variable selling expenses for special order = $4 25% = $1 per unit

Statement of Cost Benefit

Particulars	Amount($)
Revenue	10,00050.40	504,000
Less: Relevant Costs
Direct materials	10,00025	250,000
Direct labor	10,00010	100,000
Variable manufacturing overhead	10,0003	30,000
Variable selling expense	10,0001	10,000
special machine cost		20,000
Net benefit		94,000

Hence, there is a financial advantage of $94,000 of accepting the special order.

Ans.2

Total costs of production per unit(excluding variable selling expenses) = $(55-4)= $51

Statement of Cost Benefit

Particulars	Amount($)
Revenue:
Fixed Fee	10,0001.60	16,000
Reimbursement of all costs of production	10,00051	510,000
Less: Relevant Costs
Direct materials	10,00025	250,000
Direct labor	10,00010	100,000
Variable manufacturing overhead	10,0003	30,000
Net benefit		146,000

Hence, there is a financial advantage of $146,000 of accepting the U.S. Army's special order.

Ans.3

Regular Sales

Variable cost per unit = $(25+10+3+4) = $42 per unit

Contributiuon per unit = $(60-42) = $18 per unit

Statement of Cost Benefit

Particulars	Amount($)
Benefit to be achieved due to accepting the U.S. Army’s order	Refer Ans.2	146,000
Less: Contribution to be lost due to giving up regular sales of 10,000 Rets	10,00018	180,000
Net Benefit		(34000)

Hence, there is a financial disadvantage of $34,000 of accepting the U.S. Army's special order.