Question

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

  Cost of goods sold:   $5.41 (X) + $122,760

  Selling and administrative expenses:   $1.43 (X) + $67,580

where X is the number of units produced and sold. During the year, X Company sold 62,000 units for $17.00 each. At the end of the year, a company offered to buy 4,230 units but was only willing to pay $11.00 each. X Company had the capacity to produce the additional 4,230 units.

5. If X Company had accepted the special order, firm profits would have increased by $17,597

6. Consider the following three changes. Direct material costs on the special order would have increased by $0.79 per unit, direct labor costs on the special order would have decreased by $0.38 per unit, and X Company would have had to rent special equipment for $1,000. Independent of your answer to (5), the effect of these changes would have been to reduce profit on the special order by $2,734

7. In order to retain all of X Company's regular customers, it would have had to reduce the regular selling price by $0.50. 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

1-	selling price of special order	Units sold*selling price	4230*11	46530
	variable cost of goods sold	Units sold*variable cost per unit	4230*5.41	22884.3
	contribution margin			23645.7
	less variable selling expense		4230*1.43	6048.9
	net operating profit			17597
2-	New variable cost per unit		5.41+.79-.38	5.82
	selling price of special order	Units sold*selling price	4230*11	46530
	variable cost of goods sold	Units sold*variable cost per unit	4230*5.82	24618.6
	contribution margin			21911.4
	less variable selling expense		4230*1.43	6048.9
	less rent expense			1000
	net operating profit			14863
	Difference in operating profit		17597-14863	2734
3-	When selling price is reduced
	selling price of special order	Units sold*selling price	62000*10.5	651000
	variable cost of goods sold	Units sold*variable cost per unit	62000*5.41)+122760	458180
	contribution margin			192820
	less selling expense		(62000*1.43)+67580	156240
	net operating profit			36580
	When selling price is 11 per unit
	selling price of special order	Units sold*selling price	62000*11	682000
	variable cost of goods sold	Units sold*variable cost per unit	62000*5.41)+122760	458180
	contribution margin			223820
	less selling expense		(62000*1.43)+67580	156240
	net operating profit			67580
	decline in profit due to change in selling price	67580-36580		31000