Assume that due to a recession, Polaski Company expects to sell only 25,000 Rets through regularchannels next year. A large retail chain has offered to purchase 5,000 Rets if Polaski is willing toaccept 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 topurchase a special machine to engrave the retail chain’s name on the 5,000 units. This machine wouldcost $10,000. Polaski Company has no assurance that the retail chain will purchase additional units inthe future. What is the financial advantage (disadvantage) of accepting the special order?
Cost-Volume-Profit Analysis
Cost Volume Profit (CVP) analysis is a cost accounting method that analyses the effect of fluctuating cost and volume on the operating profit. Also known as break-even analysis, CVP determines the break-even point for varying volumes of sales and cost structures. This information helps the managers make economic decisions on a short-term basis. CVP analysis is based on many assumptions. Sales price, variable costs, and fixed costs per unit are assumed to be constant. The analysis also assumes that all units produced are sold and costs get impacted due to changes in activities. All costs incurred by the company like administrative, manufacturing, and selling costs are identified as either fixed or variable.
Marginal Costing
Marginal cost is defined as the change in the total cost which takes place when one additional unit of a product is manufactured. The marginal cost is influenced only by the variations which generally occur in the variable costs because the fixed costs remain the same irrespective of the output produced. The concept of marginal cost is used for product pricing when the customers want the lowest possible price for a certain number of orders. There is no accounting entry for marginal cost and it is only used by the management for taking effective decisions.
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?
Trending now
This is a popular solution!
Step by step
Solved in 2 steps with 1 images
