Question

Polaski company manufactures and sells a single product called a ret. operating at capacity the company can produce and sell 30000 rets per year. costs associated with this level of production and sales are given below: direct materials unit 20, total 600000, direct labor 6. total 180000, variable manufacturing overhead 3, total 90000, fixed manufacturing overhead 9, total 270000, variable selling expense 4. total 120000, fixed selling expense 6, total 180000. Total cost 48 $ total 1,440.000 $.
The Rets normally sell for 53 $ each. Fixed manufacturing overhead is 270000 $ per year within the range of 20000 through 30000 Rets per year.
1. Assume that due to s recession , Polaski Company expects to sell only 20000 Rets through regular channels next year. A large retail chain has offered to purchase 10000 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 10000 units. This machine would cost 20000 . 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 20000 Rets through regular channels next year. The US Army would like to make a onetime only purchase of 10000 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 pickup 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 US Army s special order?
3. Assume the same situation as described in 2 above , except that the company expects to sell 30000 Rets through regular channels next year. Thus accepting the US Army s order would require giving up regular sales of 10000 Rets. Given this new information what is the financial advantage, disadvantage of accepting the US Army s special order?

Answer 1