Question

In: Accounting

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

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

  Cost of goods sold:   $6.05 (X) + $131,670

  Selling and administrative expenses:   $1.02 (X) + $81,130

where X is the number of units produced and sold. During the year, X Company sold 66,500 units for $17.00 each. At the end of the year, a company offered to buy 4,620 units but was only willing to pay $12.00 each. X Company had the capacity to produce the additional 4,620 units.

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

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6. Consider the following three changes. Direct material costs on the special order would have increased by $0.86 per unit, direct labor costs on the special order would have decreased by $0.46 per unit, and X Company would have had to rent special equipment for $1,500. Independent of your answer to (5), the effect of these changes would have been to reduce profit on the special order by

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7. In order to retain all of X Company's regular customers, it would have had to reduce the regular selling price by $0.43. 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

Solutions

Expert Solution

5.)
Additional Profits Due to Acceptance of Offer
Particulars Details Amount
Sale $             55,440
Less: Cost of Goods Sold =$6.05*4620 $             27,951
Less : Selling and Administrative Expenses =$1.02*4620 $ 4,712
Additional Profits $             22,777
6.)
Reduction in Additional Profits
Particulars Details Amount
Additional Profits $             22,777
Add: Savings in Labour Expenses =$0.46*4620 $ 2,125
Less: Increase in Material Cost =$0.86*4620 $ 3,973
Less: Rent of Additional Equipment $ 1,500
Additional Profits(after adjustments) $             19,429
Reduction in Profits $ 3,348
7.)
Reduction in Profits due to Reduced Selling Price =$0.43*66500 $             28,595

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