Question

Polaski Company manufactures and sells a single product called a Ret. Operating at capacity, the company can produce and sell 42,000 Rets per year. Costs associated with this level of production and sales are given below:

    Unit      Total
Direct materials   $   15         $   630,000     
Direct labor      10            420,000     
Variable manufacturing overhead      3            126,000     
Fixed manufacturing overhead      7            294,000     
Variable selling expense      4            168,000     
Fixed selling expense      6            252,000     
Total cost   $   45         $   1,890,000     

The Rets normally sell for $50 each. Fixed manufacturing overhead is $294,000 per year within the range of 35,000 through 42,000 Rets per year.

Required:

1. Assume that due to a recession, Polaski Company expects to sell only 35,000 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 35,000 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 $1.80 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 42,000 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

1.

Particulars	Per Unit	Total
Incremental Sales	$           42.00	$ 294,000.00
Less:
Direct Materials	$           15.00	$ 105,000.00
Direct Labor	$           10.00	$   70,000.00
Variable Manufacturing Overhead	$             3.00	$   21,000.00
Variable Selling Expense	$             1.00	$      7,000.00
Total Cost	$           29.00	$ 203,000.00
Incremental Contribution	$           13.00	$   91,000.00
Cost of Machine		$   14,000.00
Financial Advantage		$   77,000.00

2.

Fixed fee on 7,000 rets	$   12,600.00
Fixed manufacturing cost reimbursed	$   49,000.00
Financial Advantage	$   61,600.00
No selling expenses in this case.
Other costs will be incurred and reimbursed, so these are irrelevant

3.

Fixed fee on 7,000 rets	$   12,600.00
Fixed manufacturing cost reimbursed	$   49,000.00
Total Increase	$   61,600.00
Less: Loss on regular units	$ 126,000.00
Financial disadvantage	$ -64,400.00