At the end of the year, a company offered to buy 5,000 units of a product from X Company for...

Question:

At the end of the year, a company offered to buy 5,000 units of a product from X Company for $11.00 each instead of the company's regular price of $17.00 each.

The following functional income statement is for the 65,700 units of the product that X Company has already made and sold to its regular customers:

Sales $1,116,900
Cost of goods sold 565,020
Gross margin $551,880
Selling and administrative costs 186,588
Profit $365,292

Fixed cost of goods sold for the year was $144,540, and fixed selling and administrative costs were $96,579.

The special order product has some unique features that will require additional material costs of $0.74 per unit and the rental of special equipment for $3,500.

1. Profit on the special order would be .

2. Assume the following fact: regular variable selling and administrative costs include sales commissions equal to 4% of sales, but there will be no sales commissions on the special order.

This will cause the special order profit to increase by .

Incremental Analysis:

Incremental Analysis is tool used to evaluate different alternatives by taking into account the relevant financial data of revenues and expenses of each alternative. This is used by the companies to evaluate different business scenarios when trying to decide between accepting or rejecting a special price order .

Answer and Explanation:

1) The following information is given of X company for normal sales to customers:

  • The sales for the year is 65,700 units
  • The sales price is $17 per...

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Incremental Analysis: Definition & Examples

from Accounting 301: Applied Managerial Accounting

Chapter 9 / Lesson 7
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