Question

# At the end of the year, a company offered to buy 4,280 units of a product...

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

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.

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