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 93,600 units per year is: Direct materials $ 2.40 Direct labor $ 3.00 Variable manufacturing overhead $ .70 Fixed manufacturing overhead $ 5.15 Variable selling and administrative expenses $ 1.60 Fixed selling and administrative expenses $ 2.00 The normal selling price is $24 per unit. The company’s capacity is 116,400 units per year. An order has been received from a mail-order house for 1,900 units at a special price of $21.00 per unit. This order would not affect regular sales. Required: 1. If the order is accepted, by how much will annual profits be increased or decreased? (The order will not change the company’s total fixed costs.)

Explanation / Answer

Special order contribution margin = Selling price - DM + DL + Var OH + Var SGA
Contribution margin = $21 - ($2.40+$3 +$0.70+$1.60)
Contribution Margin = $21 - $7.70 = $13.30
Annual profits = 1900 units x $13.30 = $25,270
No change In Fixed Cost

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