At the end of the year, a company offered to buy 4,180 units of a product from X
ID: 2715935 • Letter: A
Question
At the end of the year, a company offered to buy 4,180 units of a product from X Company for a special price of $12.00 each instead of the company's regular price of $18.00 each. The following information relates to the 69,600 units of the product that X Company has already made and sold to its regular customers:
Total
Per-Unit
Revenue
$1,252,800
$18.00
Cost of Goods Sold
Variable
435,696
6.26
Fixed
144,072
2.07
Selling and Administrative Costs
Variable
80,736
1.16
Fixed
100,920
1.45
Profit
$491,376
$7.06
The special order product has some unique features that will require additional material costs of $0.75 per unit and the rental of special equipment for $3,500.
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 950 units. The effect of this loss of sales will be to decrease firm profits by____?
Total
Per-Unit
Revenue
$1,252,800
$18.00
Cost of Goods Sold
Variable
435,696
6.26
Fixed
144,072
2.07
Selling and Administrative Costs
Variable
80,736
1.16
Fixed
100,920
1.45
Profit
$491,376
$7.06
Explanation / Answer
$ 856
Solution: 5. Profit on the special order would be____? A company offered to buy 4,180 units of a product from X Company for a special price of $12.00 each instead of the company's regular price of $18.00 each. Step 1: Incremental revenue. The sale of 4,180 units of a product from X Company for a special price of $12.00 each, will increase revenue by $50,160 and is relevant. $12.00 x 4,180 = $50,160 The normal sales of 69,600 units is not incremental as it will produce the same revenue regardless if the special order is accepted or not. Step 2: Incremental variable costs. When 4,180 additional units are produced, the company will incur material, labor, and variable overhead costs for these units. Because unit variable costs remain the same regardless of the activity level, you must calculate the variable unit cost for both materials and labor. Cost of Goods Sold Total Per-Unit Variable 435,696 6.26 Fixed 144,072 2.07 Selling and Administrative Costs Variable 80,736 1.16 Fixed 100,920 1.45 Unit variable cost = $435696/69,600 units = $6.26 per unit Unit variable overhead cost = 0.75 The unit costs of $6.26, $2.07,$1.16, $1.45 and $0.75 are for a single unit. Multiple the unit costs by the 4180 units in the special order to obtain total incremental variable costs: Cost of Goods Sold Variable 6.26*4180 26166.8 Fixed 2.07*4180 8652.6 Selling and Administrative Costs 34819.4 Variable 1.16*4180 4848.8 Fixed 1.45*4180 6061 Total 10909.8 Because variable costs are increased, profit will decrease by these three incremental amounts. The incremental variable costs are shown as negative amounts in the incremental analysis. 6. The marketing manager thinks that if X Company accepts the special order, regular customers will be lost, with demand falling by 950 units. The effect of this loss of sales will be to decrease firm profits by____? List the amounts in good form beginning with incremental revenue. The analysis should appear similar to the form of an income statement with descriptive line item labels: Incremental revenue $ 50,160 Incremental costs: Cost of Goods Sold -34819.4 Selling and Administrative Costs -10909.8 Variable overhead (3500*0.75) -2625 Demand falling -950 Incremental increase in profit if the order is accepted$ 856
Note the distinctive label adjacent to the $856 net total line of the analysis. It contains three key components: The 'incremental increase' (or decrease) indicates that the change is incremental, and whether the change is an increase or decrease. The 'in profit' indicates what financial component the change will affect. 'If the order is accepted' indicates what action must be taken to result in the additional (reduction of) profit. Because profit is expected to increase by $856 if the order is accepted, managers should follow through and accept the order unless qualitative issues warrant otherwise.Related Questions
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