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 92,400 units per year is: Direct materials $ 1.50 Direct labor $ 3.00 Variable manufacturing overhead $.70 Fixed manufacturing overhead $ 4.65 Variable selling and administrative expenses $ 1.40 Fixed selling and administrative expenses $ 2.00 The normal selling price is $18 per unit. The company's capacity is 123,600 units per year. An order has been received from a mail-order house for 2,600 units at a special price of $15.00 per unit. This order would not affect regular sales. Required: 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.) 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

Variable cost per unit:

Direct Material                                                            $1.50

Direct Labor                                                                $3.00

Variable Manufacturing overhead                              $0.70

Variable Selling and admistrative Expenses               $1.40

                                                                                    --------

Total Variable Cost Per Unit                                      $6.60

Contribution per Unit= Sales Price –Variable cost per unit        

                                    =$18-$6.60

                                     =$11.40

Fixed Cost:

Fixed Manufacturing overhead                                  $4.65

Fixed Selling and admistrative Expenses                   $2.00

                                                                                    --------

Total Fixed Cost Per Unit                                           $6.65

Total Fixed Cost = $6.65 X 92,400 units=$614,460

Here break even point in units= Fixed Cost/Contribution per unit

                                                 =$614,460/11.40

                                                 =53,900 units

After break even point entire contribution is profit

Here Company already selling 92,400 units more than break even sales

Hence new Contribution is the increase in income

New contribution per unit= $15-$6.6

                                            = $8.40

Increase in income = $8.40 x 2,600=$21,840

Annual Profits would increase by $21,840

2) Relavant cost per unit is Variable cost per unit=$6.60

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