Question

Problem 12-22 Special Order Decisions [LO12-4]

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	$	15			$	690,000
Direct labor		10				460,000
Variable manufacturing overhead		3				138,000
Fixed manufacturing overhead		7				322,000
Variable selling expense		2				92,000
Fixed selling expense		6				276,000
Total cost	$	43			$	1,978,000

The Rets normally sell for $48 each. Fixed manufacturing overhead is $322,000 per year within the range of 39,000 through 46,000 Rets per year.

Required:

1. Assume that due to a recession, Polaski Company expects to sell only 39,000 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 39,000 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 $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. 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 46,000 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?

Answer 1

46000	Rets Per Year
Particulars	Per Unit	Amount
Direct Materials	15	690,000.00
Direct labor	10	460,000.00
Var Manufacturing O/H	3	138,000.00
Fixed Manufacturing O/H	7	322,000.00	Fixed
Var Selling Expenses	2	92,000.00
Fixed selling Expenses	6	276,000.00
Total Cost	43	1,978,000.00
Sales	48	2,208,000.00
Profit	5	230,000.00

1. Profit calculation for due to recession:

39000	Rets Per Year			7000	Rets Per Year
			Sales Price after Discount will be $40.32
Particulars	Per Unit	Amount	Particulars	Per Unit	Amount
Direct Materials	15	585,000.00	Direct Materials	15	105,000.00
Direct labor	10	390,000.00	Direct labor	10	70,000.00
Var Manufacturing O/H	3	117,000.00	Var Manufacturing O/H	3	21,000.00
Fixed Manufacturing O/H	7	322,000.00	Additional Machine Cost		14,000.00
Var Selling Expenses	2	78,000.00	Reduced by 75%	0.5	3,500.00
Fixed selling Expenses	6	234,000.00	No Sales Commission		-
Total Cost	43	1,726,000.00			213,500.00
Sales	48	1,872,000.00	Sales Price after Discount	40.32	282,240.00
Profit	5	146,000.00	Profit		68,740.00
So Total Profit will be	39000 Rets	146,000.00
	7000 Rets	68,740.00
Total Profit		214,740.00

So after recession the profit is $214,740 as compared to $230,000, which is due to accept special order of 7000 Rets Per Year.

If we will not accept special order then financial disadvantage will be $84,000. but after accepting order of special order financial disadvantages reduce to $15,260.

2. When accepting U.S.Army order then calculation of profit given below:

39000	Rets Per Year			7000	Rets Per Year
			Army pay $1.2 per Rets as profit
Particulars	Per Unit	Amount	Particulars	Per Unit	Amount
Direct Materials	15	585,000.00	Direct Materials	15	105,000.00
Direct labor	10	390,000.00	Direct labor	10	70,000.00
Var Manufacturing O/H	3	117,000.00	Var Manufacturing O/H	3	21,000.00
Fixed Manufacturing O/H	7	273,000.00	Fixed Manufacturing O/H	7	49,000.00
Var Selling Expenses	2	78,000.00	Var Selling Expenses		-
Fixed selling Expenses	6	234,000.00	Fixed selling Expenses	6	42,000.00
Total Cost	43	1,677,000.00	Total Cost		287,000.00
Sales	48	1,872,000.00
Profit	5	195,000.00	Fixed Pay ( Profit)	1.2	8,400.00
So Total Profit will be	39000 Rets	195,000.00
	7000 Rets	8,400.00
Total Profit		203,400.00

So after accepting U.S.Army order financial advantage of $8.2 ($7 which is from Fixed Manfacturing O/H & $1.2 from fixed pay) is $57,400 i.e ($49,000 - Fixed Manufacturing O/H & $8,400 - Fixed Pay)

3. If we sells 46000 Rets through regular channels then profit will be $230,000

46000	Rets Per Year
Particulars	Per Unit	Amount
Direct Materials	15	690,000.00
Direct labor	10	460,000.00
Var Manufacturing O/H	3	138,000.00
Fixed Manufacturing O/H	7	322,000.00
Var Selling Expenses	2	92,000.00
Fixed selling Expenses	6	276,000.00
Total Cost	43	1,978,000.00
Sales	48	2,208,000.00
Profit	5	230,000.00

if we accept U.S.Army order then the profit will be $203,400.which is less of $ 26,600 as compared to $230,000.

So financial disadvantage of $26,600.