Question

The following cost functions apply to X Company's regular production and sales during the year:

  Cost of goods sold:   $6.05 (X) + $132,153

  Selling and administrative expenses:   $1.05 (X) + $76,167

where X is the number of units produced and sold. During the year, X Company sold 65,100 units for $19.00 each. At the end of the year, a company offered to buy 4,980 units but was only willing to pay $12.00 each. X Company had the capacity to produce the additional 4,980 units.

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

2. Consider the following three changes. Direct material costs on the special order would have increased by $0.76 per unit, direct labor costs on the special order would have decreased by $0.49 per unit, and X Company would have had to rent special equipment for $1,500. Independent of your answer to (1), the effect of these changes would have been to reduce profit on the special order by?

3. In order to retain all of X Company's regular customers, it would have had to reduce the regular selling price by $0.59. If the selling price were reduced and next year's unit sales turned out to be the same as this year's sales, firm profits would have fallen by?

Answer 1

Answer

Cost of Goods Sold = $6.05 (X) + $132,153

Selling and administrative expenses = $1.05 (X) + $76,167

While making the decision we will ignore the Fixed Cost, as Fixed Cost will remain same whether we accept this order or not, so it will not be considered while calculating this.

5.

Total Variable Cost = Variable Part of COGS + Variable Part of Selling and Adm. Expenses

= $6.05 + 1.05

Total Variable Cost = $7.1 per Unit

So the Special offer is giving $12 per unit, so we should accept this offer.

Profit will increase by = Sales of New order – Variable Cost of new order

= ($12 * 4,980) - ($7.1 * 4,980)

Profit will increase by = $24,402

6.

Increase in Variable Cost = Increase in D. Material Cost - Decrease in D. Labor Cost

Increase in Variable Cost = $0.27 per unit (0.76 – 0.49)

And there is a rent of $1,500, so profit will Decrease by Increase in Variable Cost plus Rent

Decrease in Profit = (Increase in Variable Cost * 4,980 Units) + Rent

Decrease in Profit = $2,844.6 {($0.27 * 4,980 Units) + $1,500}

7.

So there is a decrease in selling price it means the Profit will also decrease by this decreased Selling price.

Decrease in Price = $0.59

Units Sold = 65,100 Units

Decrease in Profit = Decrease in Price * Units Sold

Decrease in Profit =$38,409 ($0.59 * 65,100 Units)

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