At the end of the year, a company offered to buy 4,180 units of a product from X

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 $11.00 each instead of the company's regular price of $18.00 each. The following information relates to the 60,300 units of the product that X Company has already made and sold to its regular customers:

The special order product has some unique features that will require additional material costs of $0.87 per unit and the rental of special equipment for $3,000.

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 800 units. The effect of this loss of sales will be to decrease firm profits by......?

The following information is for X Company's two products, A and B:

$13,645 of Product A's fixed costs are avoidable; $32,878 of Product B's fixed costs are avoidable. X Company plans to drop Product B since it shows a loss and increase sales of Product A by $33,800. Accompanying the sales increase will be a fixed costs increase of $3,400. If X Company drops Product B and increases Product A sales, what will be the effect on firm profits?

Present Value Tables (if needed)

Present Value of $1.00

Present Value of an Annuity of $1.00

Total   Per-Unit Revenue $1,085,400 $18.00    Cost of Goods Sold    Variable 375,066 6.22       Fixed 134,469 2.23    Selling and Administrative Costs    Variable   84,420   1.40       Fixed     90,450   1.50    Profit $400,995 $6.65   

Explanation / Answer

5)

6)

Firm profit will decrease by $ 4624

If discontinue product B

Contribution margin (product A)= $ 39990

Sales increase of product A By $ 33800

Increase in fixed cost of product A $ 3400

Fixed Cost avoidable ($ 32878 + $ 13645)= $ 46523

Firm's Proft after discontinue product B = 39990+33800-3400-46523

= $ 17867

Profit on Special Order Amount $ Units Sold 4180 Revenue         45,980 Cost of Goods Sold Variable      26,000 Fixed         9,321 Additional Material cost         3,637 Selling and Admn. Cost Variable         5,852 Fixed         6,270 Rent - Equipment         3,000         54,080         (8,100)

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