Question

Polaski Company manufactures and sells a single product called a Ret. Operating at capacity, the company can produce and sell 46,000 Rets per year. Costs associated with this level of production and sales are given below:

  

	Unit			Total
Direct materials	$	25		$	1,150,000
Direct labor		6			276,000
Variable manufacturing overhead		3			138,000
Fixed manufacturing overhead		7			322,000
Variable selling expense		4			184,000
Fixed selling expense		6			276,000
Total cost	$	51		$	2,346,000

   

The Rets normally sell for $56 each. Fixed manufacturing overhead is constant at $322,000 per year within the range of 37,000 through 46,000 Rets per year.

  

Required:
1.	Assume that due to a recession, Polaski Company expects to sell only 37,000 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. Determine the impact on profits next year if this special order is accepted.

     

2.

Refer to the original data. Assume again that Polaski Company expects to sell only 37,000 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 $1.20 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. If Polaski Company accepts the order, by how much will profits increase or decrease for the year?

     

3.	Assume the same situation as that described in (2) above, except that the company expects to sell 46,000 Rets through regular channels next year. Thus, accepting the U.S. Army’s order would require giving up regular sales of 9,000 Rets. If the Army’s order is accepted, by how much will profits increase or decrease from what they would be if the 9,000 Rets were sold through regular channels?

     

Answer 1

1)	Financial Advantage	90360	(Note 1)
2)	Financial Advantage	73800	(Note 2)
3)	Financial Disadvantage	-88200	(Note 4)
	Note1:
	Reevnue from special order	423360
	Less: Cost associated with special order
	Direct Material	225000
	Direct labor	54000
	Variable manufacturing overhead	27000
	Variable selling expense	9000
	Special new machine	18000
	Financial advantage	90360
	Note 2:
	Reevnue from special order	379800	(Note 3)
	Less: Cost associated with special order
	Direct Material	225000
	Direct labor	54000
	Variable manufacturing overhead	27000
	Financial advantage	73800
	Note 3:
	Total revenue from special order
	Total unit cost	51
	Less: selling expense	10
	Cost to be reimburse	41
	Add fixed fee per unit	1.2
	Total revenue per unit	42.2
	Total revenue	379800
	Note 4:
	Reevnue from special order	379800
	Less: Cost associated with special order
	Direct Material	225000
	Direct labor	54000
	Variable manufacturing overhead	27000
	Loss of contribution margin	162000
	Financial Disadvantage	-88200