Question

Last year, X Company sold 67,200 units of its only product for $17.00 each. Total costs were as follows:

At the end of the year, a company offered to buy 4,780 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

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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 $0.72 and $0.27, respectively, and the rental of special equipment for $1,000. The combined effect of these changes would have been to reduce the special order profit by

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7. X Company's marketing manager felt that in order for regular sales to continue at 67,200 units this year, the company would have had to reduce the regular selling price this year to $16.41. The result of this price reduction would have been to reduce X Company's profits this year by

Questions 5, 6, and 7 refer to the following information Last year, X Company sold 67,200 units of its only product for $17.00 each. Total costs were as follows: Cost of goods sold Variable $450,912 Fixed 120,960 Selling and administrative Variable $90,720 Fixed 96,096 At the end of the year, a company offered to buy 4,780 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 Submit Answer 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 $0.72 and $0.27, respectively, and the rental of special equipment for $1,000. The combined effect of these changes would have been to reduce the special order profit by Submit Answer Tries 0/3 7. X Company's marketing manager felt that in order for regular sales to continue at 67,200 units this year, the company would have had to reduce the regular selling price this year to $16.41. The result of this price reduction would have been to reduce X Company's profits this year by Submit Answer Tries 0/3

Answer 1

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

Profits would have increased by = 4780*12 – 4780*450912/67200

= $25,286.2

6.Profit will reduce by the amount of extra cost i.e. (0.72+0.27)*4780 + 1000

= $5732.2

7.Reduction in profit = Reduction in price

= (17-16.41)*67,200

= $39,648