Problem 4.

Polaski Company manufactures and sells a single product called a Ret. Operating at capacity, the company can produce and sell 32,000 Rets per year. Costs associated with this level of production and sales are given below:

	Unit				Total
Direct materials	$	20			$	640,000
Direct labor		10				320,000
Variable manufacturing overhead		3				96,000
Fixed manufacturing overhead		7				224,000
Variable selling expense		2				64,000
Fixed selling expense		6				192,000
Total cost	$	48			$	1,536,000

The Rets normally sell for $53 each. Fixed manufacturing overhead is $224,000 per year within the range of 23,000 through 32,000 Rets per year.

Required:

1. Assume that due to a recession, Polaski Company expects to sell only 23,000 Rets through regular channels next year. A large retail chain has offered to purchase 9,000 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 chains name on the 9,000 units. This machine would cost $18,000. 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? (Round your intermediate calculations to 2 decimal places.)

2. Refer to the original data. Assume again that Polaski Company expects to sell only 23,000 Rets through regular channels next year. The U.S. Army would like to make a one-time-only purchase of 9,000 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?

3. Assume the same situation as described in (2) above, except that the company expects to sell 32,000 Rets through regular channels next year. Thus, accepting the U.S. Armys order would require giving up regular sales of 9,000 Rets. Given this new information, what is the financial advantage (disadvantage) of accepting the U.S. Army's special order?

Polaski Company manufactures and sells a single product called a Ret. Operating at capacity, the company can produce and sell 32,000 Rets per year. Costs associated with this level of production and sales are given below:

	Unit				Total
Direct materials	$	20			$	640,000
Direct labor		10				320,000
Variable manufacturing overhead		3				96,000
Fixed manufacturing overhead		7				224,000
Variable selling expense		2				64,000
Fixed selling expense		6				192,000
Total cost	$	48			$	1,536,000

The Rets normally sell for $53 each. Fixed manufacturing overhead is $224,000 per year within the range of 23,000 through 32,000 Rets per year.

Required:

1. Assume that due to a recession, Polaski Company expects to sell only 23,000 Rets through regular channels next year. A large retail chain has offered to purchase 9,000 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 chains name on the 9,000 units. This machine would cost $18,000. 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? (Round your intermediate calculations to 2 decimal places.)

2. Refer to the original data. Assume again that Polaski Company expects to sell only 23,000 Rets through regular channels next year. The U.S. Army would like to make a one-time-only purchase of 9,000 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?

3. Assume the same situation as described in (2) above, except that the company expects to sell 32,000 Rets through regular channels next year. Thus, accepting the U.S. Armys order would require giving up regular sales of 9,000 Rets. Given this new information, what is the financial advantage (disadvantage) of accepting the U.S. Army's special order?

Problem 5.

Prepared from a situation suggested by Professor John W. Hardy.) Lone Star Meat Packers is a major processor of beef and other meat products. The company has a large amount of T-bone steak on hand, and it is trying to decide whether to sell the T-bone steaks as they are initially cut or to process them further into filet mignon and the New York cut.

If the T-bone steaks are sold as initially cut, the company figures that a 1-pound T-bone steak would yield the following profit:

Selling price ($2.40 per pound)	$	2.40
Less joint costs incurred up to the split-off point where T-bone steak can be identified as a separate product		1.60
Profit per pound	$	0.80

If the company were to further process the T-bone steaks, then cutting one side of a T-bone steak provides the filet mignon and cutting the other side provides the New York cut. One 16-ounce T-bone steak cut in this way will yield one 6-ounce filet mignon and one 8-ounce New York cut; the remaining ounces are waste. It costs $0.14 to further process one T-bone steak into the filet mignon and New York cuts. The filet mignon can be sold for $4.00 per pound, and the New York cut can be sold for $3.40 per pound.

Required:

1. What is the financial advantage (disadvantage) of further processing one T-bone steak into filet mignon and New York cut steaks?

2. Would you recommend that the T-bone steaks be sold as initially cut or processed further?

Problem 6.

Jackson County Senior Services is a nonprofit organization devoted to providing essential services to seniors who live in their own homes within the Jackson County area. Three services are provided for seniorshome nursing, Meals On Wheels, and housekeeping. Data on revenue and expenses for the past year follow:

		Total		Home Nursing		Meals On Wheels		House- keeping
Revenues	$	924,000	$	262,000	$	408,000	$	254,000
Variable expenses		481,000		115,000		207,000		159,000
Contribution margin		443,000		147,000		201,000		95,000
Fixed expenses:
Depreciation		69,400		8,700		40,100		20,600
Liability insurance		43,400		20,200		7,500		15,700
Program administrators salaries		116,100		40,900		38,900		36,300
General administrative overhead*		184,800		52,400		81,600		50,800
Total fixed expenses		413,700		122,200		168,100		123,400
Net operating income (loss)	$	29,300	$	24,800	$	32,900	$	(28,400)

*Allocated on the basis of program revenues.

The head administrator of Jackson County Senior Services, Judith Miyama, considers last years net operating income of $29,300 to be unsatisfactory; therefore, she is considering the possibility of discontinuing the housekeeping program.

The depreciation in housekeeping is for a small van that is used to carry the housekeepers and their equipment from job to job. If the program were discontinued, the van would be donated to a charitable organization. None of the general administrative overhead would be avoided if the housekeeping program were dropped, but the liability insurance and the salary of the program administrator would be avoided.

Required:

1-a. What is the financial advantage (disadvantage) of discontinuing the Housekeeping program?

1-b. Should the Housekeeping program be discontinued?

2-a. Prepare a properly formatted segmented income statement.

2-b. Would a segmented income statement format be more useful to management in assessing the long-run financial viability of the various services?