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		10				360,000
Variable manufacturing overhead		3				108,000
Fixed manufacturing overhead		5				180,000
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 $180,000 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 $1.40 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 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

ans 1
Revenue from special order (6000*46*84%)			231840
Less: variable cost
	Unit	cost per unit
Direct materials	6000	15	90000
Direct labor	6000	10	60000
Variable manufacturing overhead	6000	3	18000
Variable selling expense	6000	0.5	3000
Total variable cost			171000
Special cost of machine			12000
Financial advantage			48840
ans 2
Total cost of production would be paid
	Unit	cost per unit
Direct materials	6000	15	90000
Direct labor	6000	10	60000
Variable manufacturing overhead	6000	3	18000
Fixed manufacturing overhead	6000	5	30000
Total cost of production would be paid			198000
Add: fixed fees (	6000	1.4	8400
Total revenue			206400
less: Incremental cost			162000
6000*(14+10+3)
Financial advantage			44400
ans 3
Total revenue from US army	206400
From regular channels (6000*46)	276000
Net decrease	-69600
Less: variable expense avoided	12000
(6000*2)
Financial disadvantage accepting US Army order	-57600