Question

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:

Answer 1

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