Question

Polaski Company manufactures and sells a single product called a Ret. Operating at capacity, the company can produce and sell 34,000 Rets per year. Costs associated with this level of production and sales are given below:

	Unit				Total
Direct materials	$	25			$	850,000
Direct labor		8				272,000
Variable manufacturing overhead		3				102,000
Fixed manufacturing overhead		7				238,000
Variable selling expense		2				68,000
Fixed selling expense		6				204,000
Total cost	$	51			$	1,734,000

The Rets normally sell for $56 each. Fixed manufacturing overhead is $238,000 per year within the range of 28,000 through 34,000 Rets per year.

3. Assume the same situation as described in (2) above, except that the company expects to sell 34,000 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?

Answer 1