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. required: 1. assume that due to a recession, polaski company expects to sell only 39,000 rets through regular channels next year. a large retail chain has offered to purchase 7,000 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 7,000 units. this machine would cost $14,000. 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? (round your intermediate calculations to 2 decimal places.)

Answer 1

The financial advantage or disadvantage of accepting the special order can be calculated by comparing the costs and revenues associated with the order. The total cost of accepting the special order is $666,000, while the revenue from selling 7,000 rets is $392,000.

Step-by-step explanation:

To determine the financial advantage or disadvantage of accepting the special order, we need to compare the costs and revenues associated with the order.

The revenue from selling 7,000 rets at a price of $56 each would be 7,000 x $56 = $392,000.

The variable selling expenses would be reduced by 75% to $92,000 x 0.25 = $23,000.

The total costs for producing 7,000 rets would be:

Direct materials: $25 x 7,000 = $175,000

Direct labor: $6 x 7,000 = $42,000

Variable manufacturing overhead: $3 x 7,000 = $21,000

Fixed manufacturing overhead: $414,000 (fixed within the range of 39,000 and 46,000)

Total costs for producing 7,000 rets = $175,000 + $42,000 + $21,000 + $414,000 = $652,000

In addition, there is the cost of purchasing the special machine, which is $14,000.

Therefore, the total cost of accepting the special order would be $652,000 + $14,000 = $666,000.

The financial advantage or disadvantage can be calculated by subtracting the total cost from the revenue:

$392,000 - $666,000 = -$274,000.