At the end of the year, a company offered to buy 4,100 units of a product from X Company for $12.00 each instead of the company's regular price of $19.00 each. The following income statement is for the 60,300 units of the product that X Company has already made and sold to its regular customers:
|Cost of goods sold||511,344|
|Selling and administrative costs||157,986|
For the year, fixed cost of goods sold were $119,394, and fixed selling and administrative costs were $88,038. The special order product has some unique features that will require additional material costs of $0.73 per unit and the rental of special equipment for $3,000.
1. Profit on the special order would be:
2. 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 $0.13. The effect of reducing the selling price will be to decrease firm profits by:
|Variable cost of goods sold||6.50||=(511344-119394)/60300|
|Variable selling and admin costs||1.16||=(157986-88038)/60300|
|Variable cost of goods sold||26650||=4100*6.50|
|Variable selling and admin costs||4756||=4100*1.16|
|Additional material costs||2993||=4100*0.73|
|Profit on special order||11801|
|Effect on reducing selling price||7839||=60300*0.13|
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