Question

At the end of the year, a company offered to buy 4,440 units of a product from X Company for $11.00 each instead of the company's regular price of $19.00 each. The following income statement is for the 70,000 units of the product that X Company has already made and sold to its regular customers: Sales $1,330,000 Cost of goods sold 627,200 Gross margin $702,800 Selling and administrative costs 178,500 Profit $524,300 For the year, variable cost of goods sold were $498,400, and variable selling and administrative costs were $79,100. The special order product has some unique features that will require additional material costs of $0.82 per unit and the rental of special equipment for $2,500. 1. Profit on the special order would be?

2.)

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 $0.11. The effect of reducing the selling price will be to decrease firm profits by?

Answer 1

Solution 1:

Variable cost of goods sold per unit = $498,400 / 70000 = $7.12 per unit

Variable selling and administrative expenses per unit = $79,100 / 70000 = $1.13 per unit

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

= 4440*$11 - 4440*($7.12 + $1.13 + $0.82) - $2,500 = $48,840 - $40,271 - $2,500 = $6,069

Solution 2:

Effect of reducing the selling price on regular orders on company profit = 70000*$0.11 = $7,700 decrease

Hence option A is correct.