Questions 5 and 6 refer to the following problem: At the end of the year, a comp

Question

Questions 5 and 6 refer to the following problem:

At the end of the year, a company offered to buy 4,800 units of a product from X Company for $12.00 each instead of the company's regular price of $19.00 each. The following functional income statement is for the 61,400 units of the product that X Company has already made and sold to its regular customers:

Fixed cost of goods sold for the year was $131,396, and fixed selling and administrative costs were $62,014. The special order product has some unique features that will require additional material costs of $0.86 per unit and the rental of special equipment for $3,500.

5. Profit on the special order would be ______

6. Assume the following fact: regular variable selling and administrative costs include sales commissions equal to 3% of sales, but there will be no sales commissions on the special order.This will cause the special order profit to increase by _______

Sales $1,166,600    Cost of goods sold    493,656    Gross margin $672,944    Selling and administrative costs      144,904    Profit $528,040   

Explanation / Answer

5.

Variable cost of goods sold per unit = (493,656 – 131,396) / 61,400 = $5.9

Variable selling and administrative cost = (144,904 – 62,014) / 61,400 = $1.35

Statement of earnings through the special order:

Particulars

Amount

Sales (4,800 × $12)

$57,600

Less: Variable cost of goods sold {4,800 × ($5.9 + $0.86)}

$32,448

Less: Rental of special equipment

$3,500

Gross margin

$21,652

Less: Variable selling and administrative cost (4,800 × $1.35)

$6,480

Profit

$15,172

Profit on special order would be $15,172.

6.

Sales commission = 3% × $12 × 4,800 = $1,728

This amount of expense would decrease, causing increase in profit by $1,728.

Particulars

Amount

Sales (4,800 × $12)

$57,600

Less: Variable cost of goods sold {4,800 × ($5.9 + $0.86)}

$32,448

Less: Rental of special equipment

$3,500

Gross margin

$21,652

Less: Variable selling and administrative cost (4,800 × $1.35)

$6,480

Profit

$15,172

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