Question

Polaski Company manufactures and sells a single product called a Ret. Operating at capacity, the company can produce and sell 44,000 Rets per year. Costs associated with this level of production and sales are given below:

	Unit				Total
Direct materials	$	25			$	1,100,000
Direct labor		10				440,000
Variable manufacturing overhead		3				132,000
Fixed manufacturing overhead		7				308,000
Variable selling expense		4				176,000
Fixed selling expense		6				264,000
Total cost	$	55			$	2,420,000

The Rets normally sell for $60 each. Fixed manufacturing overhead is $308,000 per year within the range of 38,000 through 44,000 Rets per year.

Required:

1. Assume that due to a recession, Polaski Company expects to sell only 38,000 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?

2. Refer to the original data. Assume again that Polaski Company expects to sell only 38,000 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 $1.20 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 44,000 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

Req 1:
Financial Aadvantage/ (disadvantage) of accpeting the order from Large retail chain of 6000 units
Incremental sales revenue (6000 units @ $50.40 per unit after 16% discount)								302400
Less:
Incremental material cost (6,000 units @$25)								150000
Incremental labour (6000 units @10)								60000
Incremental variable manufacturing overheads (6000 units @ 3)								18000
Incremental Selling expense (6000 units @ $ 1)								6000
Machine cost								12000
Net Financial Advantage of order accepting the order.								56400
Req 2:
Net Advantage of accepting the Army order of 6000 units:
Fixed fees received from Army per unit (6000 units @1.20)								7200
Add: Fixed Manufacturing cost per unit recovered (6000 units @ 7)								42000
Net Advantage of accepting the Army order of 6000 units:								49200
Req 3:
Contribution per unit earned rom regular customer:
Selling price per unit				60
Less: variable cost:
Material				25
labour				10
Manufacturing OH				3
Selling expense				4
Contribution margin per unit				18
Therew will be loss of sale of regular customer of 6,000 units on accpeting the order from Army.
Net advantage/(Disadvantage) on accepting the Army order:
Net advantage as computed above:								49200
Less: Lloss of contribution of regular customer(6000 units @ 18)								-108000
Net (disadvantage) of accepting the Army order								-58800