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Item 3

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Polaski Company manufactures and sells a single product called a Ret. Operating at capacity, the company can produce and sell 38,000 Rets per year. Costs associated with this level of production and sales are given below:

	Unit				Total
Direct materials	$	20			$	760,000
Direct labor		10				380,000
Variable manufacturing overhead		3				114,000
Fixed manufacturing overhead		7				266,000
Variable selling expense		4				152,000
Fixed selling expense		6				228,000
Total cost	$	50			$	1,900,000

The Rets normally sell for $55 each. Fixed manufacturing overhead is $266,000 per year within the range of 29,000 through 38,000 Rets per year.

2. Refer to the original data. Assume again that Polaski Company expects to sell only 29,000 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 $1.40 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 38,000 Rets through regular channels next year. Thus, accepting the U.S. Army’s order would require giving up regular sales of 9,000 Rets. Given this new information, what is the financial advantage (disadvantage) of accepting the U.S. Army's special order?

Answer 1

2)	Total Cost If 29000 Units Sold
	Particulars	Unit	Total
	Direct materials	$20.00	$5,80,000.00
	Direct labor	$10.00	$2,90,000.00
	Variable manufacturing overhead	$3.00	$87,000.00
	Fixed manufacturing overhead	$9.17	$2,66,000.00
	Variable selling expense	$4.00	$1,16,000.00
	Fixed selling expense	$7.86	$2,28,000.00
	Total cost	$54.03	$15,67,000.00
	Total No of Units Sold	29000
	Selling Price	$55.00	$15,95,000.00
	Profit with out US Army order		$28,000.00
	Profit from US Army order		$12,600.00	=9000*1.4
	Total Profit		$40,600.00
	There was the financial advanatge as the profit Increased from $ 28000 to $ 40600
	Since there was the decline in the expected sales and No change in Fixed Overheads which increase the Cost of Product
3)	If the expected sales was 38000 but for Accepting the US army order require Giving up regular sales
	Particulars	Unit	Total
	Direct materials	$20.00	$7,60,000.00
	Direct labor	$10.00	$3,80,000.00
	Variable manufacturing overhead	$3.00	$1,14,000.00
	Fixed manufacturing overhead	$7.00	$2,66,000.00
	Variable selling expense	$4.00	$1,52,000.00
	Fixed selling expense	$6.00	$2,28,000.00
	Total cost	$50.00	$19,00,000.00
	Total No of Units Sold	38000
	Selling Price	$55.00
	Total Profit	$1,90,000.00
	Ther was the Profit Of $1,90,000,00 for the expected sales of 38000 units But BY giving up 9000 sales and accepting US army order will result in reduction in Profit of the Polaski Company to $ 40,600 ie. There is the financial diadvantage for the Polaski Company by accepting the US army order