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

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 86,400 units per year is: The normal selling price is $22 per unit The company's capacity is 103,200 units per year. An order has been received from a mail-order house for 1,400 units at a special price of $19.00 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

1. percentage of annual profit decrease or increase :

annual profit woould be decreased by 126.50 % { (712800 - 523900) / 712800 * 100 }

Notes: As per 1400 units

     sales (1400 * $19) 26600

  less: direct material (1400 * $2.4) 3360

less: direct labour( 1400 *$3) 4200

less: Variable manufacturing overhead (1400 * .8) 1120

less: Fixed manufacturing overehad 367200

less: variable selling and administrative expenses

(1400 * $1.30 ) 1820

less: fixed selling and administrative expenses    172800   

Net profit / (Loss) (523900)

   As per 86400 units

     sales 1900800   

  less: direct material 207360

less: direct labour 259200

less: Variable manufacturing overhead 69120

less: Fixed manufacturing overehad 367200

less: variable selling and administrative expenses 112320

less: fixed selling and administrative expenses 172800   

  Net profit / (Loss) $712800

2. unit cost for units :

at 86400 units = ( 207360 + 259200 +69120 +367200 +112320 +172800) / (500units + 86400units)

= $1188000 / 86900 units

= $13.67per unit

at 1400 units = variable (2.40 + 3 + 0.80+ 1.30) + Fixed (367200 + 172800 / 1400 units + 500 units)

   = 7.5 + 284.21

   = $291.71 per unit

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