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 8 320,000 Variable manufacturing overhead 3 120,000 Fixed manufacturing overhead 7 280,000 Variable selling expense 2 80,000 Fixed selling expense 6 240,000 Total cost $ 46 $ 1,840,000 The Rets normally sell for $51 each. Fixed manufacturing overhead is $280,000 per year within the range of 31,000 through 40,000 Rets per year. Required: 1. Assume that due to a recession, Polaski Company expects to sell only 31,000 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. 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 31,000 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. 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 9,000 Rets. Given this new information, what is the financial advantage (disadvantage) of accepting the U.S. Army's special order?

Answer 1

Required 1

Since Polaski Company has a capacity of 40,000 units and it expects to sell only 31,000 units in the next year, the special order of 9000 units of Ret is within the capacity of Plaski Company.

Thus the fixed manufacturing overhead of $280,000 and the fixed selling cost of $240,000 shall be incurred irrespective of whether the special order is accepted or not. Thus these expenses are irrelevant for decision making.

Calculation of financial advantage (disadvantage ) of accepting the special order.

Selling price ($51 *84%)	$              42.84
Less:
Direct Material	$           (20.00)
Direct Labor	$              (8.00)
Variable Manufacturing overhead	$              (3.00)
Variable Selling cost ($2 * 25%)	$              (0.50)
Contribution per unit	$              11.34
Number of units	9,000
Total Contribution	$         102,060
Less: Additional Fixed cost of special machine	$         (18,000)
Net Advantage / Disadvantage	$         120,060

Thus, Polaski company should accept the spcial order.

Required 2

Calculation of total amount recovered per unit if sold to US Army

Direct Material	$              20.00
Direct Labor	$                8.00
Variable Manufacturing overhead	$                3.00
Fixed Manufacturing overhead	$                7.00
Fixed Comission	$                1.20
Total	$              39.20

Calculation of financial advantage (disadvantage ) of accepting the order of US Army

Selling price	$              39.20
Less:
Direct Material	$           (20.00)
Direct Labor	$              (8.00)
Variable Manufacturing overhead	$              (3.00)
Contribution per unit	$                8.20
Number of units	9,000
Net Advantage / Disadvantage	$           73,800

Thus, Polaski company should accept the spcial order.

Required 3

If Polaski company expects to sell 40,000 unist in the next year, Accepting an order of 9000 units from US Army would require Polaski Company to forego the contribution earned from the regular sales of these 9000 units.

Calculation of contribution earned from the regular sales of 9000 units.

Selling price	$              51.00
Less:
Direct Material	$           (20.00)
Direct Labor	$              (8.00)
Variable Manufacturing overhead	$              (3.00)
Variable Selling Cost	$              (2.00)
Contribution per unit	$              18.00
Number of units	9,000
Total contribution	$         162,000

Calculation of financial advantage (disadvantage ) of accepting the order of US Army

Contribution earned from selling to US Army	$             73,800
Contribution foregone by not selling in regular sales	$        (162,000)
Financial Advantage / (Disadvantage)	$           (88,200)

Thus, Polaski company should not accept the spcial order.

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