Question

At the end of the year, a company offered to buy 4,580 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 60,000 units of the product that X Company has already made and sold to its regular customers:

Sales		$1,140,000
Cost of goods sold		491,400
Gross margin		$648,600
Selling and administrative costs		150,000
Profit		$498,600

For the year, fixed cost of goods sold were $128,400, and fixed selling and administrative costs were $62,400. The special order product has some unique features that will require additional material costs of $0.77 per unit and the rental of special equipment for $3,000.

4. Profit on the special order would be

A: $6,555

B: $7,407

C: $8,370

D: $9,458

E: $10,687

F: $12,076

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 $0.14. The effect of reducing the selling price will be to decrease firm profits by

Answer 1

Solution 4:

Variable cost of goods sold per unit = ($491,400 - $128,400) / 60000 = $6.05 per unit

Variable selling and administrative expenses per unit = ($150,000 - $62,400) / 60000 = $1.46 per unit

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

= 4580*$11 - 4580*($6.05 + $1.46 + $0.77) - $3,000 = $50,380 - $37,922 - $3,000 = $9,458

Hence option D is correct.

Solution 5:

Effect of reducing the selling price on regular orders on company profit = 60000*$0.14 = $8,400 decrease