Question

At the end of the year, a company offered to buy 4,390 units of a product from X Company for $12.00 each instead of the company's regular price of $17.00 each. The following income statement is for the 65,300 units of the product that X Company has already made and sold to its regular customers:

Sales		$1,110,100
Cost of goods sold		614,473
Gross margin		$495,627
Selling and administrative costs		156,067
Profit		$339,560

For the year, fixed cost of goods sold were $139,742, and fixed selling and administrative costs were $81,625. The special order product has some unique features that will require additional material costs of $0.74 per unit and the rental of special equipment for $2,500.

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 $0.12. The effect of reducing the selling price will be to decrease firm profits by______

Answer 1

FIXED COST OF GOODS SOLD =139742   FIXED COST PER UNIT =139742/65300=2.14

SELLING AND ADMIN. COST =81625 SELLING AND ADMIN COST PER UNIT =81625/65300 =1.25

RENT FOR SPECIAL EQUIPMENT=2500 PER UNIT EXPENCE OF SP. EQUIPMENT RENT=2500/4390=0.57

  ADDITIONAL METERIAL COST PER UNIT    =0.74

TOTAL COST PER UNIT = 4.70

TOTAL COST FOR 4390 UNITS= 20633

TOTAL SELLING PRICE = 52680

PROFIT ON THE SPECIAL ORDER IS =52680-20633

= 32047

IF COMPANY DECREASES THE SELLING PRICE BY $0.12 THE PROFIT DECREASE BY $7836

(ie 65300*0.12=7836)