Question

# At the end of the year, a company offered to buy 4,270 units of a product...

At the end of the year, a company offered to buy 4,270 units of a product from X Company for \$12.00 each instead of the company's regular price of \$18.00 each. The following income statement is for the 64,100 units of the product that X Company has already made and sold to its regular customers:

 Sales \$1,153,800 Cost of goods sold 519,851 Gross margin \$633,949 Selling and administrative costs 168,583 Profit \$465,366

For the year, variable cost of goods sold were \$399,984, and variable selling and administrative costs were \$77,561. The special order product has some unique features that will require additional material costs of \$0.80 per unit and the rental of special equipment for \$3,000.

Profit on the special order would be:

The marketing manager thinks that if X Company accepts the special order, regular customers will be lost unless the selling price for them is reduced by \$0.16. The effect of reducing the selling price will be to decrease firm profits by:

Fixed costs are incurrend even if the special order is not accepted. Thus it is not relevant in decision making.

Variable cost of goods sold =  \$399,984 for 64,100 units. Thus variable COGS per unit = \$6.24

Variable Selling and administrative costs = \$77,561 for 64,100 units. Thu per unit = \$1.21

Additional material cost = \$ 0.80

Total cost per unit = \$6.24 + \$1.21 + \$0.80 = \$8.25

Rental of special equipment = \$3,000

Total Cost = \$8.25 x 4,270 + \$3,000 = \$38,228

Total Sales = \$12 x 4.270 = \$51,240

Profit on special order = \$51,240 - \$38,228 = \$13,012

Small change in second part
New Selling Price = \$18 - \$0.16 = \$17.84

New Sales = \$17.84 x 64,100 = \$1,143,544

New Contribution = \$1,143,544 - \$519,851 = \$623,693

Effect on profit = \$623,693 - \$633,949 = decrease by \$10,256

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