Question

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		2				72,000
Fixed selling expense		6				216,000
Total cost	$	41			$	1,476,000

The Rets normally sell for $46 each. Fixed manufacturing overhead is $252,000 per year within the range of 30,000 through 36,000 Rets per year.

Required:

1. Assume that due to a recession, Polaski Company expects to sell only 30,000 Rets through regular channels next year. A large retail chain has offered to purchase 6,000 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 6,000 units. This machine would cost $12,000. 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 30,000 Rets through regular channels next year. The U.S. Army would like to make a one-time-only purchase of 6,000 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 36,000 Rets through regular channels next year. Thus, accepting the U.S. Army’s order would require giving up regular sales of 6,000 Rets. Given this new information, what is the financial advantage (disadvantage) of accepting the U.S. Army's special order?

Answer 1

1.If the total sales remain to 30,000 units, the company would have made profit =

=(Selling Price - Variable Costs) * 30,000 - Fixed manufacturing overhead - Fixed selling expense

=($41-$28)*30,000 - 252,000 - 216,000

= ($78,000)

Selling Price to Polaski Company = 46 - (16% of 46) = $38.64

Variable Selling Expense = 2 - (75% of 2 ) = $0.5

Per unit cost of new machine to be purchased = $12,000 / 6000 = $2 per unit

Therefore calculation of per unit cost for the order

Direct materials $15

Direct labor 8

Variable manufacturing overhead 3

Fixed manufacturing overhead 7

Variable selling expense 0.5

Fixed selling expense 6

Cost of Machine 2

Total cost $41.5

Therefore per unit cost for the order is $41.5 whereas the selling price for the order after discount is $38.64. Therefore it will result into ($38.64 - $41.5) = $2.86 per unit loss for the business i.e $2.86 * 6,000 units = $17,160 total loss for the business.

Financial Advantage = 78,000 - 17160 = $60,840

Since loss is least while making the sales to company, it should be made.

2)

If the total sales remain to 30,000 units, the company would have made profit =

=(Selling Price - Variable Costs) * 30,000 - Fixed manufacturing overhead - Fixed selling expense

=($41-$28)*30,000 - 252,000 - 216,000

= ($78,000)

calculation of per unit cost for the order if sales order made to Army

Direct materials $15

Direct labor 8

Variable manufacturing overhead 3

Fixed manufacturing overhead 7

Fixed selling expense 6

Total cost $39

Amount per unit going to be received = $15 + 8 + 3 + 7 + 1.5 = 34.5

Therefore per unit cost for the order is $39 whereas the selling price for the order after discount is $34.5. Therefore it will result into ($34.5 - $39) = $4.5 per unit loss for the business i.e $4.5 * 6,000 units = $27,000 total loss for the business.

Therefore net financial advantage if order is executed = 78,000-27,000 = 51,000

3) If the company would have made normal sales, profit it would have earned = ($46-$41)*6000 = $30,000; and by selling to Army it has to incur loss of $27,000;

therefore total financial disadvantage $30,000 + $27,000 = $57,000