Question

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

Answer 1

	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