At the end of the year, a company offered to buy 4,890 units of a product from X
ID: 2463537 • Letter: A
Question
At the end of the year, a company offered to buy 4,890 units of a product from X Company for $12.00 each instead of the company's regular price of $18.00 each. The following functional income statement is for the 66,500 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 $130,340, and fixed selling and administrative costs were $97,090. The special order product has some unique features that will require additional material costs of $0.71 per unit and the rental of special equipment for $4,500.
Assume the following fact: regular variable selling and administrative costs include sales commissions equal to 2% of sales, but there will be no sales commissions on the special order. This will cause the special order profit to increase by what?
Sales $1,197,000 Cost of goods sold 569,240 Gross margin $627,760 Selling and administrative costs 195,510 Profit $432,250Explanation / Answer
Particulars
Normal (66,500 units)
Special Order (4890 units)
Selling Price
18.00
1,197,000.00
12.00
58,680.00
Less: Cost of Goods sold per unit
Variable
6.60
438,900.00
6.60
32,274.00
Additional Material coast
-
-
0.71
3,471.90
Rental charge for special equipment
-
-
0.92
4,500.00
Gross margin
11.40
758,100.00
3.77
18,434.10
Less: Selling and Administrative costs
Variable
1.48
98,420.00
1.48
7,237.20
Less: Sales commission
-
-
0.24
1,173.60
Profit
9.92
659,680.00
2.53
12,370.50
Assume the following fact: regular variable selling and administrative costs include sales commissions equal to 2% of sales, but there will be no sales commissions on the special order.
Variable Selling and Administrative costs including Sale commission = 1.48 per unit
Less: Sales commission (2% on sales) (2% of $58,680) ($1173.6 / 4890 units) = 0.24 per unit
Incremental profit = $0.24 * 4890 units = $1,173.6
Particulars
Normal (66,500 units)
Special Order (4890 units)
Selling Price
18.00
1,197,000.00
12.00
58,680.00
Less: Cost of Goods sold per unit
Variable
6.60
438,900.00
6.60
32,274.00
Additional Material coast
-
-
0.71
3,471.90
Rental charge for special equipment
-
-
0.92
4,500.00
Gross margin
11.40
758,100.00
3.77
18,434.10
Less: Selling and Administrative costs
Variable
1.48
98,420.00
1.48
7,237.20
Less: Sales commission
-
-
0.24
1,173.60
Profit
9.92
659,680.00
2.53
12,370.50
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