Question

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 6 240,000 Variable manufacturing overhead 3 120,000 Fixed manufacturing overhead 5 200,000 Variable selling expense 2 80,000 Fixed selling expense 6 240,000 Total cost $ 42 $ 1,680,000 The Rets normally sell for $47 each. Fixed manufacturing overhead is $200,000 per year within the range of 32,000 through 40,000 Rets per year. Required: 1. Assume that due to a recession, Polaski Company expects to sell only 32,000 Rets through regular channels next year. A large retail chain has offered to purchase 8,000 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 8,000 units. This machine would cost $16,000. 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 32,000 Rets through regular channels next year. The U.S. Army would like to make a one-time-only purchase of 8,000 Rets. The Army would pay a fixed fee of $1.80 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 8,000 Rets. Given this new information, what is the financial advantage (disadvantage) of accepting the U.S. Army's special order?

Answer 1

Working:-

Sale price	47
Direct Material	20
Direct Labour	6
Variable Manufacturing overhead	3
Variable Selling Overhead	2
Contribution p.u	16
Fixed Manufacturing Overhead	5
Fixed Selling Overhead	6
Net profit p.u	5

1.Retail chain

Sales Price net of discount	39.48
Direct Material	-20
Direct Labour	-6
Variable Manufacturing overhead	-3
Variable Selling Overhead	-0.5
Contribution p.u	9.98
Units	8000
Total Contribution	79840
Machinery Cost	-16000
Net receipt	63840

Net Financial Advantange of accepting offer would be $ 63840

2.U.S. Army 1

Sale price(1.8+20+6+3+5)	35.8
Direct Material	-20
Direct Labour	-6
Variable Manufacturing overhead	-3
Contribution p.u	6.8
Total contribution receipt	54400

Net financial advantage would be $54400 as Polaski is able to sell only 32000 units and has idle capacity of 8000 units with no opportunity cost.Further since all the costs of production(both variable and fixed) for 8000 units will be reimbursed by U.S Army, Polaski will have a net receipt of 54400.Fixed manufacturing overhead of 200000 will remain constant from range of 32000 units to 40000 units. Army will reimburse fixed manufacturing overhead costs allocated to 8000 units i.e 5 per unit.Further no variable selling overheads will be incurred and fixed selling overheads will be incurred regardless of level of production and will not be reimbursed by Army.

3.U.S.Army 2

	Army	Regular Channel
Sale price	35.8	47
Direct Material	-20	-20
Direct Labour	-6	-6
Variable Manufacturing overhead	-3	-3
Variable Selling Overhead	0	-2
Contribution p.u	6.8	16
Total Contribution	54400	128000

Net (Disadvantage) of Taking U.S. Army order=128000-54400=(73600)

Net financial (disadvantage) would be $73600 as Polaski is able to sell only 40000 units and has opportunity cost for 8000 units in form of contribution forgone.Fixed Manufacturing and selling overheads will be the incurred at same level in both the cases.