At the end of the year, a company offered to buy 4,100 units of a product from X

Question

At the end of the year, a company offered to buy 4,100 units of a product from X Company for a special price of $12.00 each instead of the company's regular price. The following information relates to the 68,100 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 $0.83 per unit and the rental of special equipment for $5,000.

1. Profit on the special order would be ?

2. The marketing manager thinks that if X Company accepts the special order, regular customers will be lost, with demand falling by 700 units. This loss in sales will cause firm profits to fall by ?

Total    Per-Unit Revenue $1,225,800 $18.00    Cost of Goods Sold    Variable 386,127 5.67       Fixed 134,157 1.97    Selling and Administrative Costs    Variable   97,383   1.43       Fixed     91,935   1.35    Profit $516,198 $7.58   

Explanation / Answer

Solution 1:

Solution 2:

Contribution per unit from regular order = $18 - $5.67 - $1.43 = $10.90

If X company accepts the special order then regular customer will be lost with demand falling by 700 units. This loss in sales will cause firm profits to fall by = 700 * $10.90 = $7,630

Compuatation of profit on special order - X Company Particulars Amount Revenue (4100*$12) $49,200.00 Variable Cost: Variable cost of goods sold (4100 * $5.67) $23,247.00 Variable selling and adminstrative cost (4100*$1.43) $5,863.00 Additional material cost (4100*$0.83) $3,403.00 Contribution from special order $16,687.00 Rental cost of special equipment $5,000.00 Profit on special order $11,687.00

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