Question

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:

Sales		$1,145,700
Cost of goods sold		511,344
Gross margin		$634,356
Selling and administrative costs		157,986
Profit		$476,370

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:

Answer 1

1
Variable cost of goods sold	6.50	=(511344-119394)/60300
Variable selling and admin costs	1.16	=(157986-88038)/60300
Revenue	49200	=4100*12
Less: Costs
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
Special Equipment	3000
Total costs	37399
Profit on special order	11801

2
Effect on reducing selling price	7839	=60300*0.13