At the end of the year, a company offered to buy 4,610 units of a product from X

Question

At the end of the year, a company offered to buy 4,610 units of a product from X Company for a special price of $11.00 each instead of the company's regular price. The following information relates to the 61,300 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 $0.72 per unit and the rental of special equipment for $4,000.

5. Profit on the special order would be

6. The marketing manager thinks that if X Company accepts the special order, regular customers will be lost, with demand falling by 750 units. This loss in sales will cause firm profits to fall by

Total    Per-Unit Revenue $1,164,700 $19.00    Cost of Goods Sold    Variable 410,097 6.69       Fixed 115,244 1.88    Selling and Administrative Costs    Variable   62,526   1.02       Fixed     63,139   1.03    Profit $513,694 $8.38   

Explanation / Answer

Question - 5 Profit on special order = 7847.7 or 7848

While solving questions relating to accepting or rejecting an offer, following points should be kept in mind

(1) Fixed costs are already absorbed in regular market. Hence no part of such fixed costs is relevant for taking a decision on accepting or rejecting the offer. However, $ 4000 which is incurred specifically for the offer is relevant.

(2) There is availability of enough spare capacity to handle the special offer

Question - 6 ..... This loss in sales will cause firm profits to fall by........... 8467.5

Selling price 11 Variable cost special material 0.72 Cost of goods sold 6.69 Selling and administrative cost 1.02 Total variable cost per unit 8.43 Contribution margin per unit 2.57 Number of Units in offer 4610 Total contribution 11847.7 (-) Relevant Fixed cost 4000 Profit 7847.7

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