Question

2. Refer to the original data. Assume again that Polaski Company expects to sell only 40,000 Rets through regular channels next year. The U.S. Army would like to make a one-time-only purchase of 8,000 Rets. The Army would pay a fixed fee of $1.20 per Ret, and it would reimburse Polaski Company for all costs of production (variable and fixed) associated with the units. 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 original data is missing, so I looked for a similar question to fill in the blanks:

selling price per unit $50

production costs per unit

• direct materials $15 per unit
• direct labor $8 per unit
• variable manufacturing overhead $3 per unit
• fixed overhead $9 per unit
• variable selling expense $4 per unit
• fixed selling expense $6 per unit
• total costs per unit $45

I couldn't find all the information because the questions I used to fill in the missing information all referred to lower production levels, but we face two scenarios. You should be able to choose one or the other to answer your question depending on spare capacity.

Scenario 1: Assuming that Polansky has enough spare capacity and that the Army's special order will not affect current sales, then the company's operating profit should increase by:

8,000 x $1.20 (fixed amount paid by Army) = $9,600

8,000 x $9 (fixed overhead costs reimbursed but not incurred) = $72,000

net increase in operating profit = $81,600

The company's fixed overhead would be allocated to the Rets sold through regular channels.

Scenario 2: Assuming that Polansky does not have enough spare capacity and that the Army's special will decrease current sales, then the company's operating profit should decrease by:

8,000 x ($50 - $41, variable selling not included) = $72,000

8,000 x $1.20 (fixed amount paid by Army) = ($9,600)

net decrease in operating profit = $62,400