In: Accounting
Polaski Company manufactures and sells a single product called a Ret. Operating at capacity, the company can produce and sell 46,000 Rets per year. Costs associated with this level of production and sales are given below:
Unit | Total | ||||||
Direct materials | $ | 25 | $ | 1,150,000 | |||
Direct labor | 8 | 368,000 | |||||
Variable manufacturing overhead | 3 | 138,000 | |||||
Fixed manufacturing overhead | 5 | 230,000 | |||||
Variable selling expense | 4 | 184,000 | |||||
Fixed selling expense | 6 | 276,000 | |||||
Total cost | $ | 51 | $ | 2,346,000 | |||
The Rets normally sell for $56 each. Fixed manufacturing overhead is $230,000 per year within the range of 37,000 through 46,000 Rets per year.
Required:
1. Assume that due to a recession, Polaski Company expects to
sell only 37,000 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 37,000 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 $1.80 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 46,000 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?
1) | New contribution margin | |||||||
Selling price | 56*(1-.16) | 47.04 | ||||||
less :Variable expense | ||||||||
Direct materials | 25 | |||||||
Direct labor | 8 | |||||||
variable manufacturing overhead | 3 | |||||||
variable selling expense | (4*25%) | 1 | ||||||
total variable expense | 37 | -37 | ||||||
New contribution margin | 10.04 | |||||||
total contribution margin | (9000*10.04) | 90360 | ||||||
less :cost of machine | -18,000 | |||||||
Net income | 72360 | |||||||
financail advantage | 72,360 | |||||||
2) | Fixed fee | 1.8 | ||||||
Fixed manufacturing overhead reimbursed | 5 | |||||||
total | 6.8 | |||||||
total contribution | 9000*6.8 | 61200 | ||||||
financial advantage | 61,200 | |||||||
(note though VMOH is also reimbursed ,it is not considered as the same amount | ||||||||
will be incurred in production also) | ||||||||
3) | original contribution margin per unit | |||||||
Selling price | 56 | |||||||
less :Variable expense | ||||||||
Direct materials | 25 | |||||||
Direct labor | 8 | |||||||
variable manufacturing overhead | 3 | |||||||
variable selling expense | 4 | |||||||
total variable expense | 40 | -40 | ||||||
New contribution margin | 16 | |||||||
contribution lost | (9000*16) | -144000 | ||||||
income from Army order | 61,200 | |||||||
Net loss | -82800 | |||||||
Net profit will decrease by | -82800 | |||||||
financial disadvantage | 82,800 | answer | ||||||