Question

The following cost functions apply to X Company's regular production and sales during the year:

-Cost of goods sold:   $6.35 (X) + $141,050

-Selling and administrative expenses:   $1.24 (X) + $93,600

where X is the number of units produced and sold. During the year, X Company sold 65,000 units for $19.00 each. At the end of the year, a company offered to buy 4,850 units but was only willing to pay $11.00 each. X Company had the capacity to produce the additional 4,850 units.

1.If X Company had accepted the special order, firm profits would have increased by

2.Consider the following three changes. Direct material costs on the special order would have increased by $0.70 per unit, direct labor costs on the special order would have decreased by $0.39 per unit, and X Company would have had to rent special equipment for $1,000. Independent of your answer to (5), the effect of these changes would have been to reduce profit on the special order by

3.In order to retain all of X Company's regular customers, it would have had to reduce the regular selling price by $0.35. If the selling price were reduced and next year's unit sales turned out to be the same as this year's sales, firm profits would have fallen by

Answer 1

1)

Calculation variable cost per unit

Variable Cost of goods sold per unit

Variable selling and administrative expenses per unit

Total Variable cost per unit

Selling price per unit of additional units

Profit per unit for additional units

Selling price per unit

Less: Variable cost per unit

Profit per unit

Total additional units sold

Profit increase by (4,850 x $ 3.41)

If X Company had accepted the special order, firm profits would have increased by

2)

Additional Variable Cost per unit

Increase in Direct material cost

Decrease in Direct labour cost

Additional Variable Cost per unit