1)Bed & Bath, a retailing company, has two departments—Hardware and Linens. The
ID: 2588451 • Letter: 1
Question
1)Bed & Bath, a retailing company, has two departments—Hardware and Linens. The company’s most recent monthly contribution format income statement follows:
A study indicates that $375,000 of the fixed expenses being charged to Linens are sunk costs or allocated costs that will continue even if the Linens Department is dropped. In addition, the elimination of the Linens Department will result in a 13% decrease in the sales of the Hardware Department.
Required:
What is the financial advantage (disadvantage) of discontinuing the Linens Department?
2)Polaski Company manufactures and sells a single product called a Ret. Operating at capacity, the company can produce and sell 32,000 Rets per year. Costs associated with this level of production and sales are given below:
The Rets normally sell for $49 each. Fixed manufacturing overhead is $224,000 per year within the range of 26,000 through 32,000 Rets per year.
Required:
1. Assume that due to a recession, Polaski Company expects to sell only 26,000 Rets through regular channels next year. A large retail chain has offered to purchase 6,000 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 6,000 units. This machine would cost $12,000. 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 26,000 Rets through regular channels next year. The U.S. Army would like to make a one-time-only purchase of 6,000 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 32,000 Rets through regular channels next year. Thus, accepting the U.S. Army’s order would require giving up regular sales of 6,000 Rets. Given this new information, what is the financial advantage (disadvantage) of accepting the U.S. Army's special order?
Department Total Hardware Linens Sales $ 4,070,000 $ 3,030,000 $ 1,040,000 Variable expenses 1,382,000 962,000 420,000 Contribution margin 2,688,000 2,068,000 620,000 Fixed expenses 2,190,000 1,300,000 890,000 Net operating income (loss) $ 498,000 $ 768,000 $ (270,000 )Explanation / Answer
Ans. Evalualation of situation (Linens deptt discountinue)
Step: Sales of Hardware after linens deptt discountine decrease by 13%
Revised sale (3030000X.87) = $2636100
Variable cost (9.62/30.30)X2636100= $836940
Contribution = $1799160
Fixed Cost = $1300000
Net profit = $499160
Calculation of Existing profit of the firm total
Net profit of Hardware deptt. = $768000
Net profit of Linens deptt = ($270000)
Add; Allocated FC = $375000
Net profit = $105000
Total firm existing profit (105000+768000) = $873000
Comment: Company should countinue Linens department because profit is more than if linens department is discountinue. or it is not a advantage of discountinue of linens department
Ans. Evaluation of financial Adavantage or disadvantage of special order
Sale price after 16% discount (49X.84) = $41.16
Calculation of cost of per unit associated with special order
Material 20
Labour 6
V/c 3
V/c selling (2X.75) 1.50
Total Variable cost =$30.50
contribution per unit = $10.66
Net contribution for special order (6000X10.66) = $63960
Less: cost of machine purchase for special order = ($12000)
Net profit =$51960
Comment: It is beneficial to accept the spcecial order because it will provide net profit amt $51960
2. Evaulvation of army speicial order
Army will reimburse all the fixed and variable cost associated with the special order and they will pay fixed fee $1.40 per unit, so profit amt per unit is $1.40
Net profit for 6000 units (6000X1.40) = $8400
3. Evaluation of army special order
Existing profit on Regular sales is(32000X49- $1408000) = $160000
Variable cost per unit for normal channel (44-13) = $31
Contribution per unit for normal channel (49-31) =$18
Sales with Army order
Contribution selling of 26000 Regular channel (26000X18) = $468000
Fixed fees received from army (6000X1.40) = $8400
Less: Fixed cost (224000+192000) = $416000
Net profit = $60400
or
normal contribution $18 per unit
and contribution is accept army order $1.40 and saving variable selling cost $2 per unit total $2.40
Comment: in this situation amy order is not Beneficial to the company.
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