Question

Questions 4 and 5 refer to the following problem:

At the end of the year, a company offered to buy 4,400 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 62,100 units of the product that X Company has already made and sold to its regular customers:

Sales		$1,055,700
Cost of goods sold		517,914
Gross margin		$537,786
Selling and administrative costs		168,912
Profit		$368,874

For the year, variable cost of goods sold were $398,061, and variable selling and administrative costs were $86,940. 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 $2,000.

1. Profit on the special order would be how much?

2. 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 how much?

Answer 1

4
Variable cost of goods sold	6.41	=398061/62100
Variable selling and admin costs	1.40	=86940/62100
Revenue	52800	=4400*12
Less: Costs
Variable cost of goods sold	28204	=4400*6.41
Variable selling and admin costs	6160	=4400*1.40
Additional material costs	3828	=4400*0.87
Special Equipment	2000
Total costs	40192
Profit on special order	12608
$12,608 is correct answer
5
Effect on reducing selling price	6210	=62100*0.10
$6,210 is correct answer