Delta Company produces a single product. The cost of producing and selling a sin

Question

Delta Company produces a single product. The cost of producing and selling a single unit of this product at the company's normal activity level of 108,000 units per year is: 2.10 $ 4.00 $ 0.60 manufa Fixed $ 1.40 $3.00 The normal selling price is $19.00 per unit. The company's capacity is 127,200 units per year. An order has been received from a mail-order house for 1,600 units at a special price of $16.00 per unit. This order would not affect regular sales or the company's total fixed costs. 1. What is the financial advantage (disadvantage) of accepting the special order? 2. As a separate matter from the special order, assume the company's inventory includes 1,000 units of this product that were produced last year and that are inferior to the current model. The units must be sold through regular channels at reduced prices What unit cost is relevant for establishing a minimum selling price for these units? 2 What is the fin

Explanation / Answer

Answer:

1

Financial advantage

12640

Working notes for the above answer is as under

Per
unit

for 1600
Units

Sales (a)

16

25600

less:cost

Direct material

2.1

3360

Direct labor

4

6400

variable Manufacturing Overhead

0.6

960

variable Selling and admin Exp

1.4

2240

total incremental Cost (b)

8.1

12960

Incremental profit (a-b)

7.9

12640

The fixed costs are not relevant to the decision because they will be incurred regardless of whether the special order is accepted or rejected.

_______________________________________________

2

. Answer:

Relevant cost per unit

$1.40

Explanation:

The relevant cost is $1.40 (the variable selling and administrative expenses). All other variable costs are sunk because the units have already been produced. The fixed costs are not relevant because they will not change in total as a consequence of the price charged for the left-over units.

Financial advantage

12640

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