Question

Questions 5, 6, and 7 refer to the following information Last year, X Company sold 62,500 units of its only product for $17.00 each. Total costs were as follows: Cost of goods sold Variable $398,125 Fixed 141,250 Selling and administrative Variable $93,125 Fixed At the end of the year, a company offered to buy 4,090 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 administrativa costs, it rejected the offer. 90.625 8 pt 5. If X Company had accepted the special order, firm profits would have increased by 5. AO $11,790 BO $14,737 CO 818,421 DO $23,027 EO 828,783 FO $35,979 8 pt 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 $0.82 and 80.25, 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 6. AO $3.927 BO $4,595 CO 85,376 DO 56,290 EO 87,360 FO $8,611 8 pt. X Company's marketing manager felt that in order for regular sales to continue at 62,500 units this year, the company would have had to reduce the regular selling price this year to $16.58. The result of this price reduction would have been to reduce X Company's profits this year by 7. AO $26,250 BO $38,062 CO 855,191 DO 880,020 EO $116,038 FO $168,256 8 pt The following income statement is for X Company and its only two products - A and B: Total Product A Product B Sales $176,430 885,160 S91,270 Variable Costs 105,858 51,096 54,762 Contribution margin $70,572 $34,064 $36,508 Fixed costs: Avoidable 54,570 33,290 21,280 Unavoidable 35,870 28,170 7,700 Profit 8-19,868 8-27,396 87,528 Because Product A is showing a loss, X Company is considering dropping it and saving its avoidable fixed costs. If it drops Product A, X Company's new profits will be 8. AO 8-9,415 BO 8-11,016 CO 8-12,888 DO 8-15,079 E 8-17,643 FO 8-20,642

Answer 1

Solution 5:

Variable cost of goods sold per unit = $398,125 / 62500 = $6.37 per unit

If X company accept the special order then profit will increase by = ($12 - $6.37) * 4090 = $23,027

Hence option D is correct.

Solution 6:

Reduction in special order profit by = ($0.82 + $0.25) * 4090 + $1,000 = $5,376

Hence option C is correct.

Solution 7:

Price reduction would reduce X company profit by = (62500*$0.42) = $26,250

Hence option A is correct.

Solution 8:

Net financial advantage (disadvantage) on dropping product A = Saving in fixed costs - Loss of contribution margin

= $33,290 - $34,064 = -$774

X company's new profit = -$19,868 - $774 = -$20,642

Hence option F is correct.