Question

Polaski Company manufactures and sells a single product called a Ret. Operating at capacity, the company can produce and sell 42,000 Rets per year. Costs associated with this level of production and sales are given below:

Unit Total
Direct materials $ 20 840,000
Direct labor 8 336,000
Variable manufacturing overhead 3 126,000
Fixed manufacturing overhead 7 294,000
Variable selling expense 4 168,000
Fixed selling expense 6 252,000
Total cost $48 $2,016,000

The Rets normally sell for $53 each. Fixed manufacturing overhead is $294,000 per year within the range of 32.000 through 42,000 Rets per year.

Assume that due to a recession, Polaski Company expects to sell only 32,000 Rets through regular channels next year. A large retail chain has offered to purchase 10,000 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 10,000 units. This machine would cost $20,000. 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?

Answer 1

Accepting the special order would result in a financial advantage of $299,200.

Step-by-step explanation:

In order to determine the financial advantage or disadvantage of accepting the special order, we need to calculate the costs and revenues associated with the order. The special order is for 10,000 Rets at a 16% discount off the regular price of $53 per Ret. This means the special price per Ret is $53 - ($53 * 16%) = $44.52. The special order would result in additional variable costs of $20,000 for the engraving machine. The variable selling expenses would be reduced by 75%, resulting in savings of 75% * $168,000 = $126,000.

To calculate the financial advantage or disadvantage, we need to compare the additional costs and savings with the additional revenue from the special order. Additional costs include the variable costs of $20,000 for the engraving machine. Additional savings include the reduction in variable selling expenses of $126,000. The additional revenue from the special order can be calculated by multiplying the number of units (10,000) by the special price per unit ($44.52). Total additional revenue is 10,000 * $44.52 = $445,200.

The financial advantage or disadvantage can be calculated as follows: Financial advantage (disadvantage) = Additional revenue - Additional costs - Additional savings. Financial advantage (disadvantage) = $445,200 - $20,000 - $126,000 = $299,200. Therefore, accepting the special order would result in a financial advantage of $299,200.