Question

wd 7 refer to the following information Last year, X Company sold 66,900 units of 200 units of its only product for $19.00 each. Total costs were as follows: Cost of goods sold Variable 5460,941 Fixed 131,124 Selling and administrative Variable $71,583 84.963 Fixed At the end of the year, a company offered to buy year, a company offered to buy 4.730 units of the product but only for $12.00 each. X Company had the capacity to produce the additi to produce the additional units, and even though there would have been no additional selling and administrative costs, it rejected the offer plp. If X Company had accepted the special order, firm profits would have increased by 5. AO $13,119 BO $14,824 CO 816,751 DO $18,920 EO $21,390 FO $24,170 8 pt 6. X Company's production manager thought that the special order units might have required additional direct material and direct labor costs per unit of $0.53 and 50.22, respectively, and the rental of special equipment for $1,000. The combined effect of these changes would have been to reduce the special order profit by 6. AO $1,350 BO $1,957 CO $2,838 DO $4,115 EO $5,966 FO $8,651 8 pt 7. X Company's marketing manager felt that in order for regular sales to continue at 66,900 units this year, the company would have had to reduce the regular selling price this year to $18.69. The result of this price reduction would have been to reduce X Company's profits this year by 7. AO $15,150 BO $17,726 CO 520,739 DO $24,265 EO $28,390 FO $33,216 8 pt The following income statement is for X Company and its only two products - A and B: Total Product A Product B Sales $178,910 $85,510 $93.400 Variable Costs 105,478 51,306 54.172 Contribution margin $73.432 $34,204 $39,228 Fixed costs: Avoidable 46,130 25,240 20,890 Unavoidable 34.430 28,340 6,090 Profit $-7,128 S-19,376 $12,248 Because Product A is showing a loss, X Company is considering dropping it and saving its avoidable fixed costs. If it dre Product A, X Company's new profits will be 8. AO S-10,299 BO 8-12,874 CO S-16,092 DO 8-20,115 EO 8-25,144 FO S-31,430

Answer 1

Solution

X Company

5 – Answer F

Determination of increase in profits if the firm accepts the special order:

Special order price = $12

Direct costs –

Variable cost of goods sold = $460,941/66,900 units = $6.89 per unit

Since no selling and administration costs are incurred on the special order, contribution margin on special order is as follows,

Contribution margin = $12 - $6.89 = $5.11

Special order units = 4,730

Increase in profits = increase in contribution margin = 4,730 x $5.11 = $24,170

6 – Determination of the combined effect of these changes:

Answer – Option E - $5,966

Computations:

Relevant costs for special order:

Cost of goods sold (per unit) = 460,941/66,900 = $6.89

Add: additional direct material cost per unit = $0.83

Add: additional direct labor cost per unit = $0.22

Total direct cost per unit = $7.94

Total direct cost for 4,730 units = $7.94 x 4,730 = $37,556

Add: rental of special equipment = $1,000

Total cost for special order = $38,556

Sale value = $12 x 4,730 = $56,760

net income = 56,760 – 38,556 = $18,204

net income without the changes = 24,170

Decrease in net income = 24,170 – 18,204 = $5,966

7 – determination of the result in price reduction:

Answer – Option C - $20,739

Computations:

Reduction in selling price per unit to $18.69

Sales value = $18.69 x 66,900 = $1,250,361

Less: cost of goods sold

Variable $460,941

Fixed $131,124

Total cost of goods sold $592,065

Margin = $658,296

Less: selling and administration expenses

Variable $71,583

Fixed $84,963

Total $156,546

Net income = 501,750

Original profit computation:

Sales value = $19 x 66,900 = $1,271,100

Less: cost of goods sold

Variable $460,941

Fixed $131,124

Total cost of goods sold $592,065

Gross Margin = $679,035

Less: selling and administration expenses

Variable $71,583

Fixed $84,963

Total $156,546

Net income = 522,489

Reduction in profits = original net income – net income after reduction of selling price

= 522,489 – 501,750 = $20,739

8 – Determination of X company’s new profits after dropping Product A:

Answer – Option C - $16,092

Computations:

Profit of Product B $12,248

Less: unavoidable costs of product A $28,340

Loss on discontinuation of Product A = 12, 248 – 28,340 = ($16,092)

Product A earns contribution margin of $34,204

Which absorbs avoidable fixed costs to the extent of $25,240

And the unavoidable fixed costs –

= 34,204 – 25,240 = $8,964

If product A is discontinued the entire burden of unavoidable fixed costs are borne by Product B. Hence, the overall profits are reduced to result in a loss of $16,092