Question

Polaski Company manufactures and sells a single product called a Ret. Operating at capacity, the company can produce and sell 48,000 Rets per year. Costs associated with this level of production and sales are given below:

Unit Total Direct materials $ 15 $ 720,000

Direct labor 8 384,000

Variable manufacturing overhead 3 144,000

Fixed manufacturing overhead 7 336,000

Variable selling expense 4 192,000

Fixed selling expense 6 288,000

Total cost $ 43 $ 2,064,000

The Rets normally sell for $48 each. Fixed manufacturing overhead is $336,000 per year within the range of 43,000 through 48,000 Rets per year. Required:

1. Assume that due to a recession, Polaski Company expects to sell only 43,000 Rets through regular channels next year. A large retail chain has offered to purchase 5,000 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 5,000 units. This machine would cost $10,000. 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 43,000 Rets through regular channels next year. The U.S. Army would like to make a one-time-only purchase of 5,000 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 48,000 Rets through regular channels next year. Thus, accepting the U.S. Army’s order would require giving up regular sales of 5,000 Rets. Given this new information, what is the financial advantage (disadvantage) of accepting the U.S. Army's special order?

Answer 1

1)	Financial Advantage	56,600	(Note 1)
2)	Financial Advantage	42,000	(Note 2)
3)	Financial Disadvantage	(48,000)	(Note 4)
	Note1:
	Revenue from special order	201,600
	Less: Cost associated with special order
	Direct Material	75,000
	Direct labor	40,000
	Variable manufacturing overhead	15,000
	Variable selling expense	5,000
	Special new machine	10,000
	Financial advantage	56,600
	Note 2:
	Revenue from special order	172,000	(Note 3)
	Less: Cost associated with special order
	Direct Material	75,000
	Direct labor	40,000
	Variable manufacturing overhead	15,000
	Financial advantage	42,000
	Note 3:
	Total revenue from special order
	Total unit cost	43
	Less: selling expense	10
	Cost to be reimburse	33
	Add fixed fee per unit	1.4
	Total revenue per unit	34.4
	Total revenue	172,000
	Note 4:
	Revenue from special order	172,000
	Less: Cost associated with special order
	Direct Material	75,000
	Direct labor	40,000
	Variable manufacturing overhead	15,000
	Loss of contribution margin	90,000
	Financial Disadvantage	(48,000)