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Homework answers / question archive / Polaski Company manufactures and sells a single product called a Ret

Polaski Company manufactures and sells a single product called a Ret

Accounting

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 $ 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  
 

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 reimburse Polaski for all of the variable and fixed production costs assigned to the units by the company’s absorption costing system, plus it would pay an additional fee of $1.80 per unit. 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?

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Solution:

1. Financial advantage $65,000
2. Financial advantage $54,000
3. Financial (disadvantage) ($46,000)

1.)

  Unit (a) Total - 5000 units (a × 5,000 units)
Sales from the order ($50 × 84%) $42.00 210,000
Less: costs associated with the order:    
Direct materials $15 $75,000
Direct labor $8 $40,000
Variable manufacturing overhead $3 $15,000
Variable selling expenses ($4 × 25%) $1 $5,000
Special machine ($10,000 ÷ 5000 units) $2 $10,000
Total cost $29 $145,000
     
Financial advantage of accepting the special order $13 ($42 - $29) $65,000 ($210,000 - $145,000)
     

2.)

Sales from the order:  
Reimbursement for costs of production (Variable production costs of $26 + Fixed manufacturing overhead of $9 = $35 per unit; $35 × 5000 units) $175,000
Fixed fee ($1.80 × 5000 units) $9,000
Total revenue $184,000
Less: incremental costs: variable production costs ($26per unit × 5,000 units) -$130,000
Financial advantage accepting the order $54,000
   

*$26 = $15 (DM) + $8 (DL) + $3(VMOH)

3.)

Sales:  
From the U. S. Army (above) $184,000
Loss sales from regular channels ($50 × 5,000 units) $250,000
Net decrease in revenue ($66,000)
Less: variable selling expenses avoided if the Army's order is accepted ($4.00 × 5000) $20,000
Financial (disadvantage) of accepting the order ($46,000)
   

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