Question

At the end of the year, a company offered to buy 4,860 units of a product from X Company for $12.00 each instead of the company's regular price of $19.00 each. The following income statement is for the 60,200 units of the product that X Company has already made and sold to its regular customers:

Sales		$1,143,800
Cost of goods sold		471,968
Gross margin		$671,832
Selling and administrative costs		144,480
Profit		$527,352

For the year, variable cost of goods sold were $353,374, and variable selling and administrative costs were $65,016. The special order product has some unique features that will require additional material costs of $0.85 per unit and the rental of special equipment for $3,000.

4. Profit on the special order would be

5. 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 $0.14. The effect of reducing the selling price will be to decrease firm profits by

Answer 1

while calculating special orded profit only relevant costs liek variable costs are considered. fixed costs are constant and will not increase by acceptance of special order.

sales	$58,320($12*4,860)
Less:
variable cost of godos sold	$28,528.2(4,860*$5.87) [note 1]
Variable selling and administratuve costs	$5,248.8($1.08*4,860) [note 2]
additional material	$4,131($0.85*4,860)
special equipment	$3,000
Net income	$17,412($58,320-$28,528.2-$5,248.8-$4,131-$3,000)

note 1:variable cost of goods sold per unit = $353,374/60,200=$5.87

note 2 :variable selling and administrative expense =$65,016/60,200=$1.08

Thus, increase in net profit by special order is $17,412

(5) if selling price to regular customer has to be reduced than total decrease in net profit would be

reduction in selling price*sales to regular customers

=$0.14*60,200

=$8,428