atha ear company offered to buy mation relates to instend of the hns already mad

ID: 2509779 • Letter: A

Question

atha ear company offered to buy mation relates to instend of the hns already made and sold to its regalar customers lons 5 and 6 refer to the following information: end of the year, a company offered to buy 4,690 units of a product from X Company for a special price of $12.00 each company's regular prioe. The following information relates to the 68,400 units of the product that X Compaay Total er-Unit $1,299,600 Cost of Goods Sold Variable Fixed 6.15 2.07 420,660 141,588 82,764 $377,296 Selling and Administrative Costs Variable Fixed 1.21 77,292 Profit 88.44 The special order product has some uniquse features that will require aditional material conts of S0.70 per unit and the reatal of special equipment for $4,000 pt 5. Profit on the special order would be 5. AO $6,604 BO $7,727 CO $9,04 DO 10,577 EO $12,375 FO $14,479 The marketing manager thinks that if X Company accepts the special order, regular customers will be loet, with d falling by 900 units. This loss in sales will esuse firm profits to fall b 8Pt . The marketing mannger thinks that if X Company accepts the special order, regular customers will be lat, with Sp The following information is for X Company's two prodocts, A aod Product A Produet B Revenue Total contribution margin Total fixed costs Profit 889,000 39,160 1,320 $7,450 -12,160 91,000 37,310 29,800 $15.229 of Product A's fixed costs are avoidable: $27.300 of Prouduct B's fixed costs are avoidable. X Compary plans to drop Prodact B since it shows a loss and increase sales of Product A by $25,00 Ancompanying the sales increase wilt be ase cost increase of $3,400. If x Coempany drope Product B asd increnwnes Product A sales, whst will be the efect on firs prodits? cost of making the part is 967,400. The supplier wasts X Comspany to sign a contract or the equipment that i currently s to make the part or currently mks 8,000 units of a componest part each year, but is cotsidering buying it frots a supplier f 8 pt X Compary next six yeark If X Company bugne the part, it will be able to sell the equipment peesent value of buying the part isstead of making it? will have no salvage valueat the end of six year. Assutning s discount rate of 4%, what is the net

Explanation / Answer

Solution:

Question is related on the decision making based on relevant cost.

Relevant Cost is the cost which will be incurred in future and different under each alternative course of action. The following costs are considered as relevant cost:

- Direct material cost

- Direct labor cost

- Variable manufacturing overhead

- Variable Cost of Goods Sold

- Variable selling and administrative expenses

- Fixed Cost which is directly related to the alternative course of action.

The above costs are the variable cost which will vary with the production volume. Hence these costs have both the characteristic of relevant cost i.e. it is a future cost and different under each alternative course of action.

Sometimes there are some fixed costs which will directly associated with the production or increase production units and have characteristics of relevant cost. i.e. future cost and different under each alternative course of action.

Irrelevant cost is the costs which do not play any role in decision making. Irrelevant Cost is the SUNK Cost which has already been incurred and does not change whether company accept or reject the order. Hence it is treated as IRRELEVANT COST.

Note --- It is assumed that the company idle capacity to produce the units of special order

Part 5 – Calculation of Profit from Special Order

Unit Price of Special Order

$12

Costs to be incurred for making of special order units:

Variable Cost of Goods Sold

$6.15

Variable Selling and Admn Cost

$1.21

Additional Material Cost

$0.70

Totat Cost per unit

$8.06

Contribution Margin from Special Order ($12 -8.06)

$3.94

Number of Units of Special Order

4690 Units

Total Contribution Margin (4690*$3.94)

$18,479

Less: Rent of Special Equipment

($4,000)

Profit on Special Order

$14,479

Hence the correct option is F. $14,479

Note – Fixed Cost is not considered since fixed cost is treated as SUNK Cost. It means fixed cost has already been incurred in past and play no role if decision making.

Part 6 --

Unit Selling Price

$19

Less: Variable Cost per unit (COGS 6.15 + S&A 1.21)

7.36

Contribution Margin per unit

$11.64

Number of Units Lost

900 Units

Total Loss from Regular customer

$10,476

The correct option is E. $10,476

Hope the above calculations, working and explanations are clear to you and help you in understanding the concept of question.... please rate my answer...in case any doubt, post a comment and I will try to resolve the doubt ASAP…thank you

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