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Polaski Company manufactures and sells a single product called a Ret. Operating at capacity, the company can produce and sell 48,000 Rets per year. Costs associated with this level of production and sales are given below: 2.5 points Unit $25 Total $1,200,000 384,000 144,000 3 Direct materials Direct labor Variable manufacturing overhead Fixed manufacturing overhead Variable selling expense Fixed selling expense Total cost 336,000 192,000 288,000 $2,544,000 $53 The Rets normally sell for $58 each. Fixed manufacturing overhead is $336,000 per year within the range of 41,000 through 48,000 Rets per year. Required: 1. Assume that due to a recession, Polaski Company expects to sell only 41,000 Rets through regular channels next year. A large retail chain has offered to purchase 7,000 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 7,000 units. This machine would cost $14,000. 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 41,000 Rets through regular channels next year. The U.S. Army would like to make a one-time-only purchase of 7,000 Rets. The Army would pay a fixed fee of $1.40 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 48,000 Rets through regular channels next year. Thus, accepting the U.S. Army's order would require giving up regular sales of 7,000 Rets. Given this new information, what is the financial advantage (disadvantage) of accepting the U.S. Army's special order? Answer is not complete. 1. 2. 3. Financial advantage Financial advantage Financial (disadvantage) $ 68,040 $ 58,800 Problem 11-26 Close or Retain a Store (LO11-2] Superior Markets, Inc., operates three stores in a large metropolitan area. A segmented absorption costing income statement for the company for the last quarter is given below: Superior Markets, Inc. Income Statement For the Quarter Ended September 30 North South East Total Store Store Store Sales $4,600,000 $920,000 $1,840,000 $1,840,000 Cost of goods ods 2,530,000 565,000 953,000 1,012,000 sold Gross margin 2,070,000 355,000 887,000 828,000 Selling and administrative expenses: Selling 849,000 247,400 323,000 278,600 expenses Administrative 463,000 122,000 174,900 166,100 expenses Total expenses 1,312,000 369,400 497,900 444,700 Net operating $ 758,000 $(14,400) $ 389,100 $ 383,300 income (loss) The North Store has consistently shown losses over the past two years. For this reason, management is giving consideration to closing the store. The company has asked you to make a recommendation as to whether the store should be closed or kept open. The following additional information is available for your use: a. The breakdown of the selling and administrative expenses that are shown above is as follows: North South East Total Store Store Store Selling expenses: Sales salaries $230,400 $ 62,200 $ 68,600 $ 99,600 Direct 181,000 67,000 88,000 26,000 advertising General advertising* 69,000 13,800 27,600 27,600 Store rent 305,000 85,000 118,000 102,000 Depreciation of store fixtures 24,000 6,200 7,600 10,200 Delivery salaries 25,8008,600 8,600 8,600 Depreciation of delivery equipment 13,800 4,600 4,600 4,600 Total selling $849,000 $247,400 $323,000 $278,600 expenses *Allocated on the basis of sales dollars. Total North Store South Store East Store $ 94,000 $ 29,000 $ 38,000 $ 27,000 69,000 13,800 27,600 27,600 41,000 12,300 17,000 11,700 Administrative expenses: Store managers' salaries General office salaries* Insurance on fixtures and inventory Utilities Employment taxes General office- other* Total administrative expenses 81,120 62,880 115,000 26,860 17,040 23,000 24,880 21,420 46,000 29,380 24,420 46,000 $463,000 $122,000 $174,900 $166,100 *Allocated on the basis of sales dollars. b. The lease on the building housing the North Store can be broken with no penalty. c. The fixtures being used in the North Store would be transferred to the other two stores if the North Store were closed. d. The general manager of the North Store would be retained and transferred to another position in the company if the North Store were closed. She would be filling a position that would otherwise be filled by hiring a new employee at a salary of $12,800 per quarter. The general manager of the North Store would continue to earn her normal salary of $13,800 per quarter. All other managers and employees in the North store would be discharged. e. The company has one delivery crew that serves all three stores. One delivery person could be discharged if the North Store were closed. This person's salary is $5,600 per quarter. The delivery equipment would be distributed to the other stores. The equipment does not wear out through use, but does eventually become obsolete. f. The company pays employment taxes equal to 15% of their employees' salaries. g. One-third of the insurance in the North Store is on the store's fixtures. h. The "General office salaries" and "General office-other" relate to the overall management of Superior Markets, Inc. If the North Store were closed, one person in the general office could be discharged because of the decrease in overall workload. This person's compensation is $6,900 per quarter. Required: 1. How much employee salaries will the company avoid if it closes the North Store? 2. How much employment taxes will the company avoid if it closes the North Store? 3. What is the financial advantage (disadvantage) of closing the North Store? 4. Assuming that the North Store's floor space can't be subleased, would you recommend closing the North Store? 5. Assume that the North Store's floor space can't be subleased. However, let's introduce three more assumptions. First, assume that if the North Store were closed, one-fourth of its sales would transfer to the East Store, due to strong customer loyalty to Superior Markets. Second, assume that the East Store has enough capacity to handle the increased sales that would arise from closing the North Store. Third, assume that the increased sales in the East Store would yield the same gross margin as a percentage of sales as present sales in the East store. Given these new assumptions, what is the financial advantage (disadvantage) of closing the North Store