At the end of the year, a company offered to buy 4,580 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 65,400 units of the product that X Company has already made and sold to its regular customers:
Cost of goods sold 482,652
Gross margin $759,948
Selling and administrative costs 177,888
For the year, variable cost of goods sold were $352,506, and variable selling and administrative costs were $87,636. The special order product has some unique features that will require additional material costs of $0.78 per unit and the rental of special equipment for $3,000.
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 $0.15. The effect of reducing the selling price will be to decrease firm profits by
|Variable cost of goods sold||5.39||=352506/65400|
|Variable selling and admin costs||1.34||=87636/65400|
|Variable cost of goods sold||24686||=4580*5.39|
|Variable selling and admin costs||6137||=4580*1.34|
|Additional material costs||3572||=4580*0.78|
|Profit on special order||17564|
|Effect on reducing selling price||9810||=65400*0.15|
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