Question

Last year, X Company sold 67,500 units of its only product for $17.00 each. Total costs were as follows:

Cost of goods sold
Variable	$433,350
Fixed	125,550
Selling and administrative
Variable	$97,200
Fixed	78,300

At the end of the year, a company offered to buy 4,000 units of the product but only for $11.00 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 $0.77 and $0.27, respectively, and the rental of special equipment for $2,000. 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 67,500 units this year, the company would have had to reduce the regular selling price this year to $16.68. The result of this price reduction would have been to reduce X Company's profits this year by

Tries 0/3

Answer 1

		Per unit
Sales (67,500*$17)	$1,147,500	$17
Variable cost of goods sold	$433,350	$6.42
Variable selling and administrative expenses	$97,200	$1.44
Contribution margin	$616,950	$9.14
Fixed cost of goods sold	$125,550
Fixed selling and administrative expenses	$78,300
Net income	$413,100

5. Relevant costs are variable cost of goods sold.

Increase in profit = ($11 - $6.42) * 4,000 = $18,320

6. Relevant costs = Variable cost of goods sold + Additional costs + Special equipment

= ($6.42 + $0.77 + $0.27) * 4,000 + $2,000

= $31,840

Profit from special order = 4,000 * $11 = $44,000

Profit = $44,000 - $31,840

= $12,160

Reduction in profit = $18,320 - $12,160

= $6,160

7.

		Per unit
Sales (67,500*$17)	$1,125,900	$16.68
Variable cost of goods sold	$433,350	$6.42
Variable selling and administrative expenses	$97,200	$1.44
Contribution margin	$595,350	$8.82
Fixed cost of goods sold	$125,550
Fixed selling and administrative expenses	$78,300
Net income	$391,500

Reduction in profit = $413,100 - $391,500

= $21,600