At the end of the year, a company offered to buy 4,910 units of a product from X

Question

At the end of the year, a company offered to buy 4,910 units of a product from X Company for $11.00 each instead of the company's regular price of $18.00 each. The following functional income statement is for the 62,600 units of the product that X Company has already made and sold to its regular customers: Fixed cost of goods sold for the year was $120,192, and fixed selling and administrative costs were $91,396. 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 $3,500. Profit on the special order would be Assume the following fact: regular variable selling and administrative costs include sales commissions equal to 4% of sales, but there will be no sales commissions on the special order. This will cause the special order profit to increase by

Explanation / Answer

Variable Cost of goods sold per unit = (547750 - 120192) / 62600 = $6.83

Variable selling and admin cost per unit = (179036 - 91396) / 62600 = $1.4

Total Variable Cost = $6.83 + $1.4 = $8.23

Additional Variable cost per unit for special order = $0.87

Total Cost for special order = 4910*($8.23 + $0.87) + $3500 = $48,181

Total Revenue from special order = 4910 * $11 = $54010

(5) Profit from special order = $54,010 - $48,181 = $5,829

(6) Reduction in variable cost on special order = $18 * 4% = $0.72

Increase in profit on special order = 4910 * 0.72 = $3535.20

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