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:

	Unit				Total
Direct materials	$	20			$	1,000,000
Direct labor		8				400,000
Variable manufacturing overhead		3				150,000
Fixed manufacturing overhead		7				350,000
Variable selling expense		2				100,000
Fixed selling expense		6				300,000
Total cost	$	46			$	2,300,000

The Rets normally sell for $51 each. Fixed manufacturing overhead is $350,000 per year within the range of 44,000 through 50,000 Rets per year.

Required:

1. Assume that due to a recession, Polaski Company expects to sell only 44,000 Rets through regular channels next year. A large retail chain has offered to purchase 6,000 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 6,000 units. This machine would cost $12,000. 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 44,000 Rets through regular channels next year. The U.S. Army would like to make a one-time-only purchase of 6,000 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 6,000 Rets. Given this new information, what is the financial advantage (disadvantage) of accepting the U.S. Army's special order?

Answer 1

1.Need to accept 6000 Rets at 16% discount. Before the order profit will be $178000 and after this order profit will be $198040. Workig given below:

				Selling price 16% discount	Total
		50000	44000	6000	50000
Selling price(51*.84)	51	2550000	2244000	257040	2501040
DirectMaterial	20	1000000	880000	120000	1000000
Direct Labour	8	400000	352000	48000	400000
Variable OH	3	150000	132000	18000	150000
Variable selling exp(2*.25)	2	100000	88000	3000	91000
Total Variable cost	33	1650000	1452000	189000	1641000
Contribution	18	900000	792000	68040	860040
Fixed Mfg OH(350000/44000)	7	350000	350000	12000	362000
Fixed Selling OH	6	300000	264000	36000	300000
Fixed cost	13	650000	614000	48000	662000
Net profit	5	250000	178000	20040	198040

2.In the second option, this also we have to accept. Profit before accepting the offer is $178000 and after aceepting the offer from US Army it will be $186400. Working given below:

				Selling price $1.40 per Ret	Total
		50000	44000	6000	50000
Selling price(51*.84)	51	2550000	2244000	8400	2252400
DirectMaterial	20	1000000	880000		880000
Direct Labour	8	400000	352000		352000
Variable OH	3	150000	132000		132000
Variable selling exp(2*.25)	2	100000	88000		88000
Total Variable cost	33	1650000	1452000		1452000
Contribution	18	900000	792000	8400	800400
Fixed Mfg OH(350000/44000)	7	350000	350000		350000
Fixed Selling OH	6	300000	264000		264000
Fixed cost	13	650000	614000		614000
Net profit	5	250000	178000	8400	186400

3. The third option we have to reject. Because actual profit is $ 250000 and after giving up 6000 units for US Army offer, we are loosing $63600($250000-$186400) in this deal. Hence rejected the order from US Army ad accept regular order