At the end of the year, a company offered to buy 4,200 units of a product from X
ID: 2574024 • Letter: A
Question
At the end of the year, a company offered to buy 4,200 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 67,400 units of the product that X Company made and sold to its regular customers during the year:
Fixed cost of goods sold for the year were $148,280, and fixed period costs were $94,360. Variable period costs include selling commissions equal to 2% of revenue.
1. Profit on the special order is_____?
2. Assume the following two changes for the special order: 1) variable cost of goods sold will increase by $0.72 per unit, and 2) there will be no selling commissions. What will be the effect of these two changes on the special order profit?
Per-unit Total Cost of goods sold $7.80 $ 525,720 Period costs 2.68 180632 Total $10.48 $706,352Explanation / Answer
Solution:
Part 1)
First of all we need to understand the terms used in the question..Fixed Period Cost, Variable Period Cost and Fixed Cost of Goods Sold and Variable Cost of Goods Sold..
Fixed Costs are treated as period cost. Period Costs are the cost which incurred for a period. Generally it is fixed. Period Costs are considered as Sunk Cost since it does not have the influence on decision making whether to make product or sale product or sale to outside customer. It will remain same in alternative course of action, hence play no role in decision making.
In this type of question, we need to find out Relevant Cost related to decision making. Relevant Costs are the cost which will incur in future and different under each alternative course of action. Here Relevant Costs are:
- Variable Cost of Goods Sold
- Variable Period Cost
So, we will analyze the question based on these two costs.
Bifurcation of Fixed and Variable Cost
Total
Fixed
Variable (Total - Fixed)
Per Unit Variable Cost (Variable Cost / 67,400 Units)
Cost of goods sold
$525,720
148280
$377,440
$5.60
Period costs
180632
94360
86272
$1.28
Total
$706,352
Per Unit Variable Cost (excluding sales commission 2%*18 = $0.36) = $1.28 – 0.36 = $0.92
Relevant Cost for the Special Order
Total Units of Special Order = 4,200 Units
Relevant Cost for Special Order = Variable Cost of Goods Sold per Unit + Variable Period Cost
= $5.60 + $0.92 + Sales Commission $11*2%
= $5.60 + $0.92 + $0.22
= $6.74
Total Relevant Cost for Special Order = 4200 Units x $6.74 = $28,308
Sales Revenue from Special Order = 4200 Units x $11 = $46,200
Profit on the Special Order = 46,200 – 28,308 = $17,892
Part 2)
Calculation of Relevant Cost for Special Order
Revised Variable Cost of Goods Sold
(5.60 + 0.72)
$6.32
Variable Period Cost
$0.92
No Commission
0
Total Relevant Cost per unit
$7.24
Offered Price by Customer
$11
Profit per unit on special order (11 – 7.24)
$3.76
Total Units of Special Order
4,200 Units
Total Profit
$15,792
Effect of the changes ---- The profit will be decreased by $2,100 (17,892 – 15,792) due to changes
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
Total
Fixed
Variable (Total - Fixed)
Per Unit Variable Cost (Variable Cost / 67,400 Units)
Cost of goods sold
$525,720
148280
$377,440
$5.60
Period costs
180632
94360
86272
$1.28
Total
$706,352
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.