The Rets normally sell for $50 each. Fixed manufacturing overhead is $270,000 per year within the range of 25,000 through 30,000 Rets per year. Required: 1. Assume that due to a recession, Polaski Company expects to sell only 25,000 Rets through regular channels next year. A large retail chain has offered to purchase 5,000 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 5,000 units. This machine would cost $10,000. 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?

Question

Meadow

Business

22 May, 21:31

The Rets normally sell for $50 each. Fixed manufacturing overhead is $270,000 per year within the range of 25,000 through 30,000 Rets per year. Required: 1. Assume that due to a recession, Polaski Company expects to sell only 25,000 Rets through regular channels next year. A large retail chain has offered to purchase 5,000 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 5,000 units. This machine would cost $10,000. 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?

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Evony · Answer 1

Financial advantage 12,500

Explanation:

special order:

sales revenue 5,000 units x $50 x (1 - 16% discount) = 210,000

variable cost 5,000 x $50 x 75% = (187,500)

special order additional cost (10,000)

financial result 12,500

The selling price will take a 16% discount

The variable cost are 75% of the sales price.

This special order will be between the relevant range, so it will not generate addiotnal fixed cost

Howver, it will additional 10,000 cost for an special machine.

With this in mind, we can solve for the financial result which, is a financial advantage for 12,500