Polaski Company manufactures and sells a single product called aRet. Operating at capacity, the company can produce and sell 38,000Rets per year. Costs associated with this level of production andsales are given below:
| Unit | | Total |
| Direct materials | $ | 15 | | | $ | 570,000 | |
| Direct labor | | 8 | | | | 304,000 | |
| Variable manufacturing overhead | | 3 | | | | 114,000 | |
| Fixed manufacturing overhead | | 7 | | | | 266,000 | |
| Variable selling expense | | 4 | | | | 152,000 | |
| Fixed selling expense | | 6 | | | | 228,000 | |
| Total cost | $ | 43 | | | $ | 1,634,000 | |
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The Rets normally sell for $48 each. Fixed manufacturingoverhead is $266,000 per year within the range of 29,000 through38,000 Rets per year.
Required:
1. Assume that due to a recession, Polaski Company expects tosell only 29,000 Rets through regular channels next year. A largeretail chain has offered to purchase 9,000 Rets if Polaski iswilling to accept a 16% discount off the regular price. There wouldbe no sales commissions on this order; thus, variable sellingexpenses would be slashed by 75%. However, Polaski Company wouldhave to purchase a special machine to engrave the retail chain’sname on the 9,000 units. This machine would cost $18,000. PolaskiCompany has no assurance that the retail chain will purchaseadditional units in the future. What is the financial advantage(disadvantage) of accepting the special order? (Round yourintermediate calculations to 2 decimal places.)
2. Refer to the original data. Assume again that Polaski Companyexpects to sell only 29,000 Rets through regular channels nextyear. The U.S. Army would like to make a one-time-only purchase of9,000 Rets. The Army would pay a fixed fee of $1.80 per Ret, and itwould reimburse Polaski Company for all costs of production(variable and fixed) associated with the units. Because the armywould pick up the Rets with its own trucks, there would be novariable selling expenses associated with this order. What is thefinancial advantage (disadvantage) of accepting the U.S. Army'sspecial order?
3. Assume the same situation as described in (2) above, exceptthat the company expects to sell 38,000 Rets through regularchannels next year. Thus, accepting the U.S. Army’s order wouldrequire giving up regular sales of 9,000 Rets. Given this newinformation, what is the financial advantage (disadvantage) ofaccepting the U.S. Army's special order?
