Question

At the end of the year, a company offered to buy 4,560 units of a product from X Company for $12.00 each instead of the company's regular price of $19.00 each. The following income statement is for the 63,400 units of the product that X Company has already made and sold to its regular customers:

Sales		$1,204,600
Cost of goods sold		512,906
Gross margin		$691,694
Selling and administrative costs		159,768
Profit		$531,926

For the year, fixed cost of goods sold were $131,238, and fixed selling and administrative costs were $71,642. The special order product has some unique features that will require additional material costs of $0.84 per unit and the rental of special equipment for $4,500.

4. Profit on the special order would be

A: $5,747

B: $6,724

C: $7,867

D: $9,204

E: $10,769

F: $12,600

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

A: $5,681

B: $7,101

C: $8,876

D: $11,095

E: $13,869

F: $17,336

Answer 1

Profit on special order
Sales Revenue	$       54,720
($12*4560)
Less:
Cost of goods sold	$       27,451
[(512906-131238)/63400*4560]
Selling and Admin Cost	$         6,338
[(159768-71642)/63400*4560]
Additional Materials	$         3,830
($0.84*4560)
Special Equipment Rent	$         4,500
Profit	$       12,600
Correct Option : F.12600
Decrease in profit due to price reduction	$         8,876
($0.14*63400)
Correct Option: F.8876