Question

Questions 4 and 5 refer to the following problem:

At the end of the year, a company offered to buy 4,050 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 62,900 units of the product that X Company has already made and sold to its regular customers:

Sales		$1,195,100
Cost of goods sold		556,665
Gross margin		$638,435
Selling and administrative costs		162,911
Profit		$475,524

For the year, variable cost of goods sold were $423,946, and variable selling and administrative costs were $88,689. The special order product has some unique features that will require additional material costs of $0.78 per unit and the rental of special equipment for $3,000.

4. Profit on the special order would be

Tries 0/3

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 $0.16. The effect of reducing the selling price will be to decrease firm profits by

Tries 0/3

Answer 1

Solution 4:

Variable cost of goods sold per unit = $423,946 / 62900= $6.74 per unit

Variable selling and administrative expenses per unit = $88,689 / 62900 = $1.41 per unit

Profit on special order = Revenue from special order - Variable cost - Additional fixed costs

= 4050*$11 - 4050*($6.74 + $1.41 + $0.78) - $3,000 = $44,550 - $36,166 - $3,000 = $5,384

Solution 5:

Effect of reducing the selling price on regular orders on company profit = 62900*$0.16 = $10,064 decrease