Question

Last year, X Company sold 69,400 units of its only product for $18.00 each. Total costs were as follows: Cost of goods sold Variable $450,406 Fixed 126,308 Selling and administrative Variable $72,870 Fixed 71,482 At the end of the year, a company offered to buy 4,430 units of the product but only for $12.00 each. X Company had the capacity to produce the additional units, and even though there would have been no additional selling and administrative costs, it rejected the offer. 5. If X Company had accepted the special order, firm profits would have increased by Tries 0/3 6. X Company's production manager thought that the special order units might have required additional direct material and direct labor costs per unit of $0.80 and $0.23, respectively, and the rental of special equipment for $1,500. The combined effect of these changes would have been to reduce the special order profit by Tries 0/3 7. X Company's marketing manager felt that in order for regular sales to continue at 69,400 units this year, the company would have had to reduce the regular selling price this year to $17.69. The result of this price reduction would have been to reduce X Company's profits this year by?

Answer 1

Since there is spare capacity, no additional fixed costs will be incurred on the special order

Profits would have increased by = 4430*12 – 4430*450406/69400

= $24,409.3

6.Profit will reduce by the amount of extra cost i.e. (0.80+0.23)*4430 + 1500

= $6062.9

7.Reduction in profit = Reduction in price

= (18-17.69)*69400

= $21,514