Question

At the end of the year, a company offered to buy 4,280 units of a product from X Company for $11.00 each instead of the company's regular price of $18.00 each. The following income statement is for the 61,300 units of the product that X Company has already made and sold to its regular customers: Sales $1,103,400 Cost of goods sold 446,264 Gross margin $657,136 Selling and administrative costs 170,414 Profit $486,722 For the year, fixed cost of goods sold were $114,631, and fixed selling and administrative costs were $79,077. 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 $3,500. 4. Profit on the special order would be A: $1,611 B: $2,336 C: $3,387 D: $4,911 E: $7,120 F: $10,324

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 A: $4,159 B: $5,531 C: $7,356 D: $9,783 E: $13,012 F: $17,306

Answer 1

Solution 4 :

Variable cost of goods sold per unit = ($446,264 - $114,631) / 61300 = $5.41 per unit

Variable selling and administrative expenses per unit = ($170,414 - $79,077) / 61300 = $1.49 per unit

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

= 4280*$11 - 4280*($5.41 + $1.49 + $0.87) - $3,500 = $47,080 - $33,256 - $3,500 = $10,324

Hence option F is correct.

Solution 5:

Effect of reducing the selling price on regular orders on company profit = 61300*$0.12 = $7,356 decrease

Hence option C is correct.