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In: Accounting

QUESTION #1 (2 PARTS): X Company produces and sells 69,400 units of its regular product each...

QUESTION #1 (2 PARTS):

X Company produces and sells 69,400 units of its regular product each year for $14.00 each. The following cost information relates to this production:

Total   Per-Unit
  Direct materials $138,106 $1.99    
  Direct labor [all variable] 113,816 1.64    
  Variable overhead 188,768 2.72    
  Fixed overhead 156,844 2.26    
  Variable selling 72,176 1.04    
  Fixed selling 90,914 1.31    


A company has offered to buy 4,340 units for $11.93 each. Because the special order product is slightly different than the regular product, direct material costs will increase by $0.15 per unit, and some special equipment will have to be rented for a total of $12,000.

1. Profit on the special order is ___________

2. Assume that if X Company accepts the special order, regular sales will fall by 1,000 units. Independent of #1, the effect of the fall in regular sales will be to decrease company profit by ____________

Solutions

Expert Solution

Variable cost per unit = Direct Material + Direct Labor + Variable overhead + Variable Selling

= $1.99 + $1.64 + $2.72 + $1.04

= $7.39 per unit

Selling Price per unit = $14 per unit.

The above information is for the regular production by the X Company.

Question 1: Profit on special order:

In order to produce the special order, X Company incur only the variable costs and special equipment rental cost. There would be increase of $0.15 per unit with respect to Materials.

The variable cost per unit for the special order = $7.39 + $0.15 - $1.04 = $6.5 per unit

Since this is a special order, X Company need not incur the variable selling expenses.

The Profit from the special order would be $11,566.20

Question 2: effect of the fall in regular sales on the company profit:

Contribution for the regular units = $14 - $7.39 = $6.61 per unit.

If the sales of regular units fall by 1,000 units, the company would lose the contribution from those 1,000 units.

Decrease in Profit = Decrease in Contribution

= $6.61 x 1,000

= $6,610

Decrease in profit is $6,610.

ekkarill92 answered 1 year ago
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