Question

At the end of the year, a company offered to buy 4,650 units of a product from X Company for $11.00 each instead of the company's regular price of $17.00 each. The following income statement is for the 68,900 units of the product that X Company has already made and sold to its regular customers:

Sales		$1,171,300
Cost of goods sold		596,674
Gross margin		$574,626
Selling and administrative costs		175,006
Profit		$399,620

For the year, variable cost of goods sold were $457,496, and variable selling and administrative costs were $93,704. The special order product has some unique features that will require additional material costs of $0.89 per unit and the rental of special equipment for $2,500.

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 $0.11. The effect of reducing the selling price will be to decrease firm profits by

Answer 1

Part 4

	Total	Divided by: regular units sold	Per unit
Variable cost of goods sold	$        457,496	68,900	$            6.64
Variable selling and administrative costs	$          93,704	68,900	$            1.36
Revised Variable cost of goods sold per unit (6.64+0.89)			$            7.53
Variable selling and administrative costs per unit			$            1.36
Variable cost per unit for special order			$            8.89
Sales (11*4650)			$ 51,150.00
Less: variable cost (8.89*4650)			$ 41,338.50
Contribution margin			$    9,811.50
Less: fixed cost (rental of special equipment)			$    2,500.00
Profit on the special order would be			$    7,311.50

Part 5

Decrease in contribution margin from regular customer (68900*0.11)			$    7,579.00
Less: changed in fixed cost			$ 0
Profits would be decreased by			$ 7,579.00