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At the end of the year, a company offered to buy 4,590 units of a product from X

ID: 2574198 • Letter: A

Question

At the end of the year, a company offered to buy 4,590 units of a product from X Company for a special price of $11.00 each instead of the company's regular price of $17.00 each. The following information relates to the 61,000 units of the product that X Company made and sold to its regular customers during the year:


Fixed cost of goods sold for the year were $135,420, and fixed period costs were $64,050. Variable period costs include selling commissions equal to 4% of revenue.

5. Profit on the special order is

6. Assume the following two changes for the special order: 1) variable cost of goods sold will decrease by $0.73 per unit, and 2) there will be no selling commissions. What will be the effect of these two changes on the special order profit?

Per-Unit Total      Cost of goods sold $8.23    $502,030    Period costs 2.28    139,080    Total $10.51    $641,110   

Explanation / Answer

Workings:

Fixed cost of goods sold, and fixed period costs are not considered since they remain unaffected by the acceptance or rejection of the special order and are hence irrelevant.

Selling commissions should not be considered since the customer has approached X Company directly so there would be no selling commissions payable on the special order.

Variable Period costs = Total period costs $139080 - Fixed period costs $64050 = $75030

Relevant variable period costs = Variable period costs $75030 - Selling commission (61000 x $17 x 4%) = $75030 - $41480 = $33550

Relevant variable period costs per unit = $33550 / 61000 units = $0.55

With no selling commission, the relevant variable period costs = $75030

Relevant variable period costs per unit = $75030 / 61000 units = $1.23

5 Profit on the special order is: $20379.60 6 Special order profit will increase by $229.50