At the end of the year, a company offered to buy 4,240 units of a product from X

Question

At the end of the year, a company offered to buy 4,240 units of a product from X Company for a special price of $11.00 each instead of the company's regular price of $18.00 each. The following information relates to the 66,600 units of the product that X Company has already made and sold to its regular customers:

The special order product has some unique features that will require additional material costs of $0.84 per unit and the rental of special equipment for $4,000.

Profit on the special order would be?

The marketing manager thinks that if X Company accepts the special order, regular customers will be lost, with demand falling by 700 units. The effect of this loss of sales will be to decrease firm profits by?

Explanation / Answer

a)

46640

**Fixed manufactuirng and selling cost is constant and will have no impact if this order is accepted.

b)

contribution per unit from regular customer = 18 - 6.49 -1.01 = 10.50

Loss of sales = 10.50*700 = $ 7350

Decrease of firm profit = 7350 - 7278.4

                                           = -71.60

sales   (4240 *11)

46640

less: Variable cost of goods sold    (6.49 + .84 ) = 7.33 * 4240 (31079.2) Rent (4000) Variable selling    (1.01*4240) (4282.4) profit 7278.40

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