Question

Problem 12-22 Special Order Decisions [LO12-4]

Polaski Company manufactures and sells a single product called a Ret. Operating at capacity, the company can produce and sell 30,000 Rets per year. Costs associated with this level of production and sales are given below:

	Unit				Total
Direct materials	$	25			$	750,000
Direct labor		8				240,000
Variable manufacturing overhead		3				90,000
Fixed manufacturing overhead		9				270,000
Variable selling expense		2				60,000
Fixed selling expense		6				180,000
Total cost	$	53			$	1,590,000

The Rets normally sell for $58 each. Fixed manufacturing overhead is $270,000 per year within the range of 20,000 through 30,000 Rets per year.

Required:

1. Assume that due to a recession, Polaski Company expects to sell only 20,000 Rets through regular channels next year. A large retail chain has offered to purchase 10,000 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 10,000 units. This machine would cost $20,000. 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 20,000 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?

3. Assume the same situation as described in (2) above, except that the company expects to sell 30,000 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

a. Net income increases by $102200

b. Net income increases by $104000

c. Net income decreases by $96000

Workings:

Part a:

	Per unit	For 10,000 units
Sales revenue	48.72	487200
Direct materials	25	250000
Direct labor	8	80000
Variable manufacturing overhead	3	30000
Variable selling expense	0.5	5000
Investment in machine		20,000
Financial advantage (disadvantage) of accepting the special order		102200

Part b:

	Per unit	For 10,000 units
Fixed fee	1.4	14000
Fixed OH reimbursed	9	90000
Financial advantage (disadvantage) of accepting the special order		104000

Part C;

	Per unit	Full capacity (30,000 units)	20,000 units
Sales revenue	58	1740000	1160000
Direct materials	25	750000	500000
Direct labor	8	240000	160000
Variable manufacturing overhead	3	90000	60000
Fixed manufacturing overhead	9	270000	270000
Variable selling expense	2	60000	40000
Fixed selling expense	6	180000	180000
Profit		150000	-50000

Decrease in profit if special order is accepted	200000
Financial advantage of accepting	104000
Net disadvantage	96000