Question

X Company produces 67,700 units of its regular product each year and sells each one for $14.00. The following cost information is available:

	Total	Per-Unit
Direct materials	$154,356	$2.28
Direct labor	123,891	1.83
Variable overhead	199,715	2.95
Fixed overhead	137,431	2.03
Variable selling	89,364	1.32
Fixed selling	68,377	1.01
Total	$773,134	$11.42

A company has offered to buy 4,070 units for $13.71 each. Because the special order product is slightly different than the regular product, direct material costs will increase to $2.48 per unit, and some special equipment will have to be rented for a total of $13,000.

Question: Assume that if X Company accepts the special order, regular sales would fall by 1,050 units. The effect of this fall in regular sales would be to decrease company profit by?

Answer 1

Answer- 1)- Profit would be on special order = $7879.

Explanation-

Profit on special order
Partciulars		Amount
		$
Sales price	4070 units*$13.71 per unit	55800
Less- Costs
Direct materials	4070 units*$2.48 per unit	10094
Direct labor	4070 units*$1.83 per unit	7448
Variable overhead	4070 units*$2.95 per unit	12007
Variable selling	4070 units*$1.32 per unit	5372
Rent on special equipment		13000
Total costs		47921
Profit on special order $		7879

2)- The effect of this fall in regular sales would be to decrease company profit by = $5901.

Explanation-

Profit decrease in regular sales
Partciulars		Amount
		$
Sales price	1050 units*$14 per unit	14700
Less- Costs
Direct materials	1050 units*$2.28 per unit	2394
Direct labor	1050 units*$1.83 per unit	1922
Variable overhead	1050 units*$2.95 per unit	3098
Variable selling	1050 units*$1.32 per unit	1386
Total costs		8799
Net Profit $		5901