Question: Polaski Company manufactures and sells a single product called a Ret.

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Question: Polaski Company manufactures and sells a single product called a Ret. Operating at capacity, the ...

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:

The Rets normally sell for $50 each. Fixed manufacturing overhead is $270,000 per year within the range of 25,000 through 30,000 Rets per year.

Required:

1. Assume that due to a recession, Polaski Company expects to sell only 25,000 Rets through regular channels next year. A large retail chain has offered to purchase 5,000 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 5,000 units. This machine would cost $10,000. 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 25,000 Rets through regular channels next year. The U.S. Army would like to make a one-time-only purchase of 5,000 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 30,000 Rets through regular channels next year. Thus, accepting the U.S. Army’s order would require giving up regular sales of 5,000 Rets. Given this new information, what is the financial advantage (disadvantage) of accepting the U.S. Army's special order?

Unit Total Direct materials $ 15 $ 450,000 Direct labor 8 240,000 Variable manufacturing overhead 3 90,000 Fixed manufacturing overhead 9 270,000 Variable selling expense 4 120,000 Fixed selling expense 6 180,000 Total cost $ 45 $ 1,350,000

Explanation / Answer

Answer:

A)

Option

Amount $

1

Net increase in profits by

65000

Working notes for the above answer is as under

Calculation of the impact on profits next year if this special order is accepted

Incremental Revenue
= 5000*(52 * (1-16%))

210000

Less:

Direct Material Cost = 5000*15

-75000

Direct Labor Cost =5000*10

-40000

Variable Manufacturing Cost =5000*3

-15000

Variable Selling Expenses =5000*4*(1-75%)

-5000

Cost of Special Machine

-10,000

Net increase in profits

65000

B)

Option

Amount $

2

Net increase in profits by

54000

Working notes for the above answer is as under

Calculation of the impact on profits next year if this special order is accepted

Incremental Revenue = 5000*1.8

9000

Additional recovery of   Fixed manufacturing overhead = 5000*9

45000

Net increase in profits

54000

C)

Option

Amount $

3

Net Decrease in profits

-46000

Working notes for the above answer is as under

Incremental Revenue = 5000*1.8

9000

Additional recovery of   Fixed manufacturing overhead = 5000*9

45000

Less: Loss on contribution on regular units
=5000*(50-15-8-3-4)

-100000

Net Decrease in profits

-46000

Option

Amount $

1

Net increase in profits by

65000

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