At the end of the year, a company offered to buy 4,070 units of a product from X

Question

At the end of the year, a company offered to buy 4,070 units of a product from X Company for $11.00 each instead of the company's regular price of $18.00 each. The following functional income statement is for the 60,100 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 $111,786, and fixed selling and administrative costs were $73,322. The special order product has some unique features that will require additional material costs of $0.82 per unit and the rental of special equipment for $2,000. Profit on the special order would be Assume the following fact: regular variable selling and administrative costs include sales commissions equal to 4% of sales, but there will be no sales commissions on the special order. This will cause the special order profit to increase by

Explanation / Answer

Working In $ per unit Units Total Sales 18 60100 1081800 Cost of goods sold - Fixed 111786 - Variable 6.31 60100 379231 Gross Margin 590783 Selling & Admin exp. - Fixed 73322 - Variable 1.01 60100 60701 Profit 456760 Answer 1 Profit on the special order would be In $ per unit Units Total in $ Sales 11 4070 44,770.00 (-) Cost of goods sold 7.13 4070 29,019.10 Gross Margin 15,750.90 (-) Selling & admin exp. 1.01 4070     4,110.70 (-) Equipment rent     2,000.00 Profit     9,640.20 Answer 2 Sales commission = 4% of sales i.e.4% of $18 =$ 0.72 per unit Hence variable selling and admin exp.per unit excluding sales commission of 4 % = $1.01 - $0.72 = $0.29 per unit Profit on the special order would be In $ per unit Units Total in $ Sales 11 4070 44,770.00 (-) Cost of goods sold 7.13 4070 29,019.10 Gross Margin 15,750.90 (-) Selling & admin exp. 0.29 4070     1,180.30 (-) Equipment rent     2,000.00 Profit 12,570.60 Special order profit to increase by = $12570.60 - $9640.20 = $2930.40

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