5 Problem 12-22 Special Order Decisions [LO12-4] 10 points Polaski Company manuf

Question

5 Problem 12-22 Special Order Decisions [LO12-4] 10 points Polaski Company manufactures and sells a single product called a Ret. Operating at capacity, the company can produce and sell 48,000 Rets per year. Costs associated with this level of production and sales are given below: Skipped Unit Total Direct materials Direct labor Variable manufacturing overhead Fixed manufacturing overhead Variable selling expense Fixed selling expense Total cost $15 $ 720,000 288,000 144,000 eBook 336,000 96,000 288,000 $39 $1,872,000 2 Print Reference The Rets normally sell for $44 each. Fixed manufacturing overhead is $336,000 per year within the range of 41,000 through 48,000 Rets per year Required 1. Assume that due to a recession, Polaski Company expects to sell only 41,000 Rets through regular channels next year. A large retail chain has offered to purchase 7,000 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 7,000 units. This machine would cost $14,000. 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 41,000 Rets through regular channels next year. The U.S. Army would like to make a one-time-only purchase of 7,000 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 48,000 Rets through regular channels next year. Thus, accepting the U.S. Army's order would require giving up regular sales of 7,000 Rets Given this new information, what is the financial advantage (disadvantage) of accepting the U.S. Army's special order? 2 3

Explanation / Answer

1) New contribution margin Selling price   44*(1-.16) 36.96 less :Variable expense Direct materials 15 Direct labor 6 variable manufacturing overhead 3 variable selling expense (2*25%) 0.5 total variable expense 24.5 -24.5 New contribution margin 12.46 total contribution margin (7000*12.46) 87220 less :cost of machine -14,000 Net income 73220 financail advantage 73,220 2) Fixed fee 1.4 Fixed manufacturing overhead reimbursed 7 total 8.4 total contribution   7000*8.6 58800 financial advantage 58,800 (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   44 less :Variable expense Direct materials 15 Direct labor 6 variable manufacturing overhead 3 variable selling expense 2 total variable expense 26 -26 New contribution margin 18 contribution lost (7000*18) -126000 income from Army order 58,800 Net loss -67200 Net profit will decrease by -67200 financial disadvantage 67,200 answer

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