In: Accounting
Polaski Company manufactures and sells a single product called a
Ret. Operating at capacity, the company can produce and sell 36,000
Rets per year. Costs associated with this level of production and
sales are given below:
Unit Total
Direct materials $ 15
$ 540,000
Direct labor 8
288,000
Variable manufacturing overhead
3
108,000
Fixed manufacturing overhead 7
252,000
Variable selling expense 4
144,000
Fixed selling expense 6
216,000
Total cost $ 43
$ 1,548,000
The Rets normally sell for $48 each. Fixed manufacturing overhead
is $252,000 per year within the range of 29,000 through 36,000 Rets
per year.
Required:
1. Assume that due to a recession, Polaski Company expects to sell
only 29,000 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 29,000 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 $1.60 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 36,000 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?
1.
Sales [7000 x ($48 x 84%)] | 282240 | |
Less: Expenses | ||
Direct materials (7000 x $15) | 105000 | |
Direct labor (7000 x $8) | 56000 | |
Variable manufacturing overhead (7000 x $3) | 21000 | |
Variable selling expense [7000 x ($4 x 25%)] | 7000 | |
Cost of special machine | 14000 | |
Total expenses | 203000 | |
Financial advantage $ | 79240 |
2.
Revenue: | ||
Fixed fee (7000 x $1.60) | 11200 | |
Reimbursement of costs | ||
Direct materials (7000 x $15) | 105000 | |
Direct labor (7000 x $8) | 56000 | |
Variable manufacturing overhead (7000 x $3) | 21000 | |
Fixed manufacturing overhead (7000 x $7) | 49000 | 231000 |
Total revenue | 242200 | |
Less: Expenses | ||
Direct materials (7000 x $15) | 105000 | |
Direct labor (7000 x $8) | 56000 | |
Variable manufacturing overhead (7000 x $3) | 21000 | |
Total expenses | 182000 | |
Financial advantage $ | 60200 |
Note: The fixed manufacturing overheads will remain the same even if the one-time-only purchase order from the U.S. Army is accepted since the production is within the relevant range. Hence, the same is not considered under the expenses however, since all variable and fixed costs of production will be reimbursed, the same is considered in the total revenue.
3.
Revenue from U.S. Army | 242200 |
Revenue from regular customers (7000 x $48) | 336000 |
Net increase (decrease) in revenue | -93800 |
Add: Savings in variable selling expenses (7000 x $4) | 28000 |
Financial (disadvantage) $ | -65800 |