At the end of the year, a company offered to buy 4,570 units of a product from X Company for $11.00 each instead of the company's regular price of $19.00 each. The following income statement is for the 68,900 units of the product that X Company has already made and sold to its regular customers:
|Cost of goods sold||538,798|
|Selling and administrative costs||174,317|
For the year, variable cost of goods sold were $405,132, and variable selling and administrative costs were $86,125. The special order product has some unique features that will require additional material costs of $0.87 per unit and the rental of special equipment for $3,000.
4. Profit on the special order would be
5. 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 $0.10. The effect of reducing the selling price will be to decrease firm profits by
|Variable cost per goods sold per unit [ 405132 / 68900 ]||5.88|
|Variable selling and administrative cost per unit [ 86125 / 68900 ]||1.25|
|Sales [ 4570 * 11 ]||50270|
|(-) Variable Cost of goods sold [ 4570 * (5.88+0.87) ]||30848|
|(-) Variable selling and administrative expense [ 4570*1.25 ]||5713|
|(-) Rent of special equipment||3000|
|Profit on the special order||10710|
|Reducing the selling price will decrease firms profit by 6890 [ i.e. 68900*0.10 ]|
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