Question

Polaski company manufactures and sells a single product called a ret. operating at capacity, the company can produce and sell 46,000 rets per year. costs associated with this level of production and sales are given below: unit total direct materials $ 25 $ 1,150,000 direct labor 6 276,000 variable manufacturing overhead 3 138,000 fixed manufacturing overhead 9 414,000 variable selling expense 2 92,000 fixed selling expense 6 276,000 total cost $ 51 $ 2,346,000 the rets normally sell for $56 each. fixed manufacturing overhead is $414,000 per year within the range of 39,000 through 46,000 rets per year. 2. refer to the original data. assume again that polaski company expects to sell only 39,000 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 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 $1.40 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?

Answer 1

The financial advantage of accepting the U.S. Army's special order for 7,000 rets is $9,800. This is because the company would be reimbursed for the variable costs of $238,000 and receive an additional fee of $9,800, which contributes to covering any fixed costs or increasing profit.

Step-by-step explanation:

The financial advantage or disadvantage of accepting the U.S. Army's special order for 7,000 rets from the Polaski Company can be analyzed by looking at the incremental costs and revenues associated with the order. Since the company can produce and sell 46,000 rets per year, producing an additional 7,000 for the Army when only 39,000 are expected to be sold through regular channels would not incur any additional fixed manufacturing overhead, as these costs are already covered by the initial 39,000 units.

The variable costs for producing one ret are $25 (direct materials) + $6 (direct labor) + $3 (variable manufacturing overhead) = $34 per unit. Multiplying the variable cost by the additional 7,000 units gives a total variable cost of $238,000 for the special order. There are no variable selling expenses for this order. The U.S. Army would reimburse these costs and pay a fixed fee of $1.40 per unit, resulting in $9,800 ($1.40 x 7,000) additional revenue.

To calculate the total financial impact, add the reimbursement for variable costs to the additional fee. Thus, the total reimbursement is $238,000 + $9,800 = $247,800. Since the variable costs for the order are completely covered, the entire $9,800 fee contributes to covering fixed costs or increasing profit. Therefore, the financial advantage of accepting the special order is $9,800.