—5,000 unitsSales from the order ($50 × 84%)42210000Less costs associated with the order:Direct materials1575000Direct labor840000Variable manufacturing overhead315000Variable selling expense ($4 × 25%)15000Special machine ($10,000 ÷ 5,000 units) 2 10,000Total costs29145,000Net increase in profits13$ 65,000Note:Here fixed costs will not change as a result of the order, they are not relevant to the decision. The cost of the new machine is relevant, and this cost will have to be recovered by the current order because there is no assurance of future business from the retail chain___________________________________________________________________2Sales from the orderReimbursement for costs of production
(variable production costs of $26 plus fixed manufacturing overhead cost of $9 = $35 per unit; $35 per unit × 5,000 units)175000Fixed fee ($1.80 per unit × 5,000 units) 9,000Total revenue184000Less incremental costs—variable production costs130,000($26 per unit × 5,000 units)Net increase in profits$ 54,000_____________________________________________3Sales:From the U.S. Army (above)184000From regular channels ($50 per unit × 5,000 units)250,000Net decrease in revenue-66000Less variable selling expenses avoided if the Army’s order is accepted ($4 per unit × 5,000 units) 20,000Net decrease in profits if the Army’s order is accepted-46000
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PROBLEM 11-3A Comprehensive Variance Analysis
Marvel Parts, Inc., manufactures auto accessories. One of the company’s products is a set of seat
covers that can be adjusted to fit nearly any small car. The company has a standard cost system
in use for all of its products. According to the standards that have been set for the seat covers, the
factory should work 2,850 hours each month to produce 1,900 sets of covers. The standard costs
associated with this level of production are:
During August, the factory worked only 2,800 direct labor-hours and produced 2,000 sets of covers.
The following actual costs were recorded during the month:
At standard, each set of covers should require 5.6 yards of material. All of the materials purchased
during the month were used in production.
Compute the following variances for August:
1. The materials price and quantity variances.
2. The labor rate and efficiency variances.
3. The variable overhead rate and efficiency variances.
PROBLEM 9-5A Accept or Reject a Special Order
Polaski Company manufactures and sells a single product called a Ret. Operating at capacity, the company can produce
and sell 30,000 Rets per year. Costs associated with this level of production and sales are given below:
Direct materials . . . . . . . . . . . . . . . . .
Direct labor . . . . . . . . . . . . . . . . . . . .
Variable manufacturing overhead .
Fixed manufacturing overhead . . . .
Variable selling expense . . . . . . . . .
Fixed selling expense . . . . . . . . . . . .
Total cost . . . . . . . . . . . . . . . . . . . . .
The Rets normally sell for $50 each. Fixed manufacturing overhead is constant at $270,000 per year within the range of
24,000 through 30,000 Rets per year.
Assume that due to a recession, Polaski Company expects to sell only 24,000 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. Determine the impact on profits next year if this special
order is accepted. Show and label all calculations.
Refer to the original data. Assume again that Polaski Company expects to sell only 24,000 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 $1.80 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. If Polaski Company accepts the order, by how much
will profits increase or decrease for the year? Show and label all calculations.
Assume the same situation as that described in (2) above, except that the company expects to sell 30,000 Rets
through regular channels next year. Thus, accepting the U.S. Army’s order would require giving up regular sales
of 5,000 Rets. If the Army’s order is accepted, by how much will profits increase or decrease from what they
would be if the 5,000 Rets were sold through regular channels? Show and label all calculations.
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