Question

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	$	20			$	920,000
Direct labor		6				276,000
Variable manufacturing overhead		3				138,000
Fixed manufacturing overhead		5				230,000
Variable selling expense		2				92,000
Fixed selling expense		6				276,000
Total cost	$	42			$	1,932,000

The Rets normally sell for $47 each. Fixed manufacturing overhead is $230,000 per year within the range of 36,000 through 46,000 Rets per year.

1. Refer to the original data. Assume again that Polaski Company expects to sell only 36,000 Rets through regular channels next year. The U.S. Army would like to make a one-time-only purchase of 10,000 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?

2. 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 10,000 Rets. Given this new information, what is the financial advantage (disadvantage) of accepting the U.S. Army's special order?

Answer 1

2)	Fixed fee				1.4
	Fixed manufacturing overhead reimbursed				5
	total				6.4
	total contribution		10000*6.4		64000
	financial advantage		64,000
	(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					47
	less :Variable expense
	Direct materials				20
	Direct labor				6
	variable manufacturing overhead				3
	variable selling expense				2
	total variable expense				31	-31
	New contribution margin					16
	contribution lost		(10000*16)			-160000
	income from Army order					64,000
	Net loss					-96000
	Net profit will decrease by			-96000
	financial disadvantage			96,000	answer