FINANCIAL ACCOUNTING
FINANCIAL ACCOUNTING
10th Edition
ISBN: 9781259964947
Author: Libby
Publisher: MCG
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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 $ 15     $ 690,000  
Direct labor   6       276,000  
Variable manufacturing overhead   3       138,000  
Fixed manufacturing overhead   7       322,000  
Variable selling expense   4       184,000  
Fixed selling expense   6       276,000  
Total cost $ 41     $ 1,886,000  
 

 

The Rets normally sell for $46 each. Fixed manufacturing overhead is $322,000 per year within the range of 41,000 through 46,000 Rets per year.

 

Assume again that Polaski Company expects to sell only 41,000 Rets through regular channels next year. The U.S. Army would like to make a one-time-only purchase of 5,000 Rets. The Army would pay a fixed fee of $1.60 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?

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