Item6 6 points Return to question Item 6 Item 6 6 points Polaski Company manufac
ID: 2511960 • Letter: I
Question
Item6 6 points Return to question Item 6 Item 6 6 points 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 $ 20 $ 880,000 Direct labor 6 264,000 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 $ 46 $ 2,024,000 The Rets normally sell for $51 each. Fixed manufacturing overhead is $308,000 per year within the range of 35,000 through 44,000 Rets per year. Required: 1. Assume that due to a recession, Polaski Company expects to sell only 35,000 Rets through regular channels next year. A large retail chain has offered to purchase 9,000 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 9,000 units. This machine would cost $18,000. 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 35,000 Rets through regular channels next year. The U.S. Army would like to make a one-time-only purchase of 9,000 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 44,000 Rets through regular channels next year. Thus, accepting the U.S. Army’s order would require giving up regular sales of 9,000 Rets. Given this new information, what is the financial advantage (disadvantage) of accepting the U.S. Army's special order?
Explanation / Answer
Answer:
1
Calculation of the impact on profits next year if this special order is accepted
Incremental Revenue
= 9000*(51 * (1-16%))
385560
Less:
Direct Material Cost = 9000*20
-180000
Direct Labor Cost =9000*6
-54000
Variable Manufacturing Cost =9000*3
-27000
Variable Selling Expenses =9000*4*(1-75%)
-9000
Cost of Special Machine
-18000
Net increase in profits
97560
_________________________________________
2
Calculation of the impact on profits next year if this special order is accepted
Incremental Revenue = 9000*1.8
16200
Additional recovery of Fixed manufacturing overhead = 9000*7
63000
Net increase in profits
79200
_________________________________________
3
Incremental Revenue = 9000*1.8
16200
Additional recovery of Fixed manufacturing overhead = 9000*7
63000
Less: Loss on contribution on regular units
=9000*(52-15-10-3-4)
-162000
Net Decrease in profits
-82800
Calculation of the impact on profits next year if this special order is accepted
Incremental Revenue
= 9000*(51 * (1-16%))
385560
Less:
Direct Material Cost = 9000*20
-180000
Direct Labor Cost =9000*6
-54000
Variable Manufacturing Cost =9000*3
-27000
Variable Selling Expenses =9000*4*(1-75%)
-9000
Cost of Special Machine
-18000
Net increase in profits
97560
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