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 91,200 units per year is:

  Direct materials $ 2.00
  Direct labor $ 3.00
  Variable manufacturing overhead $ .70
  Fixed manufacturing overhead $ 4.05
  Variable selling and administrative expenses $ 1.20
  Fixed selling and administrative expenses $ 2.00

The normal selling price is $20 per unit. The company’s capacity is 109,200 units per year. An order has been received from a mail-order house for 1,500 units at a special price of $17.00 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.)

   

2.

Assume the company has 500 units of this product left over from last year 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? (Round your answer to 2 decimal places.)

    

  

Explanation / Answer

The financial advantage is computed as follows:

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

Explanation

The financial advantage is computed as follows:

Per Unit 1,500 Units Incremental sales $ 17 $ 25,500 Incremental costs: Direct materials 2 3,000 Direct labor 3 4,500 Variable manufacturing overhead 0.7 1,050 Variable selling and administrative 1.2 1,800 Total incremental costs $ 6.9 10,350 Financial advantage of accepting the special order 10.1 15,150

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

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