Question

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

  Cost of goods sold:   $6.05 (X) + $132,153

  Selling and administrative expenses:   $1.05 (X) + $76,167

where X is the number of units produced and sold. During the year, X Company sold 65,100 units for $19.00 each. At the end of the year, a company offered to buy 4,980 units but was only willing to pay $12.00 each. X Company had the capacity to produce the additional 4,980 units.

1. If X Company had accepted the special order, firm profits would have increased by $24,402

2. Consider the following three changes. Direct material costs on the special order would have increased by $0.76 per unit, direct labor costs on the special order would have decreased by $0.49 per unit, and X Company would have had to rent special equipment for $1,500. Independent of your answer to (1), the effect of these changes would have been to reduce profit on the special order by?

Answer 1

Answer:- X’s company cost with proposed changes =($6.05 per unit+ $1.05 per unit+$0.76 per unit+ $0.49 per unit )*4980 units+$1500

=$41583+$1500 =$43083

Offer value =$12 per unit*4980 units

=$59760

Firm profits after considering proposed changes=$59760-$43083 =$16677

The effect of these changes would have been to reduce profit on the special order by=$24402-$16677 =$7725

Explanation:-

Offer price =$12 per unit

X’s company cost =$6.05 per unit+ $1.05 per unit

=$7.10 per unit

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

= ($12 per unit-$7.10 per unit)*4980 units

=$24402

Fixed cost will not be considered for decision making , its continue to be occurred whether offer is accepted or not, it is an unavoidable costs.