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Last year, X Company sold 63,500 units of its only product for $19.00 each. Total costs...

Last year, X Company sold 63,500 units of its only product for $19.00 each. Total costs were as follows:

Cost of goods sold
   Variable $436,245
   Fixed 141,605
Selling and administrative
   Variable $79,375
   Fixed 90,170


At the end of the year, a company offered to buy 4,930 units of the product but only for $12.00 each. X Company had the capacity to produce the additional units, and even though there would have been no additional selling and administrative costs, it rejected the offer.

1. If X Company had accepted the special order, firm profits would have increased by __________?

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Answer #1

Answer

  • If special order is accepted, Selling and admin expenses will not increase.
  • Even the Fixed ‘cost of goods sold’ will not increase.
  • Only Variable cost of goods will increase.
  • Calculation:
    >Incremental revenue = 4930 units x $ 12 = $ 59,160
    >Incremental cost = 4930 units x ($436245 / 63500) = $ 33,869
    >Incremental profits = 59160 – 33869 = $ 25291
  • Answer
    The firm     profits would have increased by $ 25,291 (or $ 25,209.90)
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