Please answer both 5 and 6. At the end of the year, a company offered to buy 4,1
ID: 2462493 • Letter: P
Question
Please answer both 5 and 6.
At the end of the year, a company offered to buy 4,190 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 62,400 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 $128,544, and fixed selling and administrative costs were $80,496. 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 $4,000.
5. Profit on the special order would be
6. 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
Explanation / Answer
5.
Note: The fixed expenses of cost of goods sold and selling and administrative expenses are irrelevant for calculation of profit from special order.
6.
If variable selling and administrative expense includes sales commision of 2% of sales and for special order the sales commision will not incur then the profit on special order will increase by following amount.
Variable selling and administrative expenses will be reduced by $0.36 per unit therefore the total variable selling and administrtive cost for 4,190 units will also decreases by $1,508.40 (4,190 @ $0.36) and profit will also be increased by $1,508.40.
Special selling rate $11 variable cost of goods sold calculated as under: Total cost of goods sold for 62,400 uts $ 523,536 Fixed cost of goods sold $ (128,544) variable cost of goods sold $ 394,992 Units sold 62,400 Variable cost of goods sold per unit $ 6.33 Total selling and administrative costs $ 155,376 Less: Fixed selling and adminsitrative cost $ (80,496) Variable selling and administrative costs $ 74,880 Units sold 62,400 Variable selling and administrative cost per unit $ 1.20 The profit from special order would be as under: Units offered 4,190 Special offer rate $11.00 Less: Variable cost of goods sold $ (6.33) Variable selling and administrative costs $ (1.20) Additional material costs $ (0.87) Contribution per unit $ 2.60 Total contribution @ $2.60 $ 10,894 Less: Rent for special equipment $ (4,000) Profit from special order $ 6,894