Question

Polik company makes and sells a single product called Ret. Operating at full capacity will give 30000 units per year. Costs associated at this 30000 level of production are as follows: Direct material $450000 Direct labor $240000 Variable overhead $90000 Fixed overhead $270000 Variable selling $120000 Fixed selling $180000 Total $1350000 The Rets are normally sold for a price of $50 per unit. Fixed overhead of $270000 is for a range of 25000 to 30000 units per year. 2. Now ignore question 1 and refer to the original data. Assume that next year sales will be only 25000 units. The US army would like to make a onetime purchase of 5000 units. The army would pay a fixed fee of $1.80 per unit and in addition would reimburse the company for all variable and fixed costs associated with this order. There will be no variable selling expenses on this order. a. What will be the impact on company’s income if this order is accepted? b. Should the company accept or reject? 3. Assume the same situation in question 2, except that the company will be able to sell 30000 units next year. Should Polik accept this Army order? Why or why not? 4. Now refer to the original data and assume next year sale will be 25000 units. Another retailer has approached this company to place a special order for 10000 units at a price of $40.00 per unit. There will be no variable selling expense on this order.

I think that the answer to # 2 is an increase of 54,000. I think that the answer for # 3 is a decrease by 46,000. However i do not know if these are right i am unsure about the fixed manufacturing on # 2.  

Answer 1

2. a. Impact on the company's income if the order is accepted = Fixed fee per unit + Reimbursement of fixed Manufacturing Overhead = 5,000 x 1.80 + 270,000 / 30,000 x 5,000 = $ 54,000.

The company's income will increase by $ 54,000.

b. Yes, the company should accept the order.

3. Contribution margin per unit of regular sales orders = $ 50 - $ ( 450,000 + 240,000 + 90,000 + 120,000) / 30,000 = $ 20.

Contribution lost on 5,000 units of regular orders = $ 5,000 x $ 20 = $ 100,000.

Net Impact on operating income of accepting the special order = $ 54,000 - $ 100,000 = $ ( 46,000)

Therefore, income will decrease by $ 46,000.

Polik should not accept the army order.

4. Contribution from 10,000 units of the special order = 10,000 x [ $ 40 - $ 26] = $ 140,000.

Contribution lost on 5,000 units of regular sales = $ 100,000.

Net impact of accepting the special order on the company's income = $ 140,000 - $ 100,000 = $ 40,000.

Therefore, operating income will increase by $ 40,000, and the company should accept the retailer's offer.