At the end of the year, a company offered to buy 4,800 units of a product from X

Question

At the end of the year, a company offered to buy 4,800 units of a product from X Company for $12.00 each instead of the company's regular price of $19.00 each. The following functional income statement is for the 61,400 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 $131,396, and fixed selling and administrative costs were $62,014. The special order product has some unique features that will require additional material costs of $0.86 per unit and the rental of special equipment for $3,500.

5. Profit on the special order would be $15,172

6. Assume the following fact: regular variable selling and administrative costs include sales commissions equal to 3% of sales, but there will be no sales commissions on the special order. This will cause the special order profit to increase by ______

Sales $1,166,600    Cost of goods sold    493,656    Gross margin $672,944    Selling and administrative costs      144,904    Profit $528,040   

Explanation / Answer

For the purpose of the evaluating and pricing the special order, the variable cost are the relevant costs. So the relevant costs in the problem are:

Variable cost of Cost of goods sold = $493656 - $131396 = $362260 / 61400 = $5.90

Variable cost of Selling and administrative costs = 144904 -62014 = $82890 / 61400 = $1.35

Additional material costs = $0.86 per unit

the rental of special equipment for $3,500.

(5) Profit on the special order would be = [12- (5.90 +1.35 + 0.86)] * 4800 - 3500 = $15172

(6) Commission cost of Selling and administrative costs = 12 *3% = $0.36

If there is no commission on special order, the profit of the special order will increase by 0.36 * 4800 = $1728

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