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 60,000 units per year is: Direct materials $5.10 Direct labor $3.80 Variable manufacturing overhead $1.00 Fixed manufacturing overhead $4.20 Variable selling and administrative expense $1.50 Fixed selling and administrative expense $2.40 The normal selling price is $21 per unit. The company's capacity is 75,000 units per year. An order has been received from a mail-order house for 15,000 units at a special price of $14.00 per unit. This order would not affect regular sales. 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 1,000 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?

Explanation / Answer

As the order does not affect the fixed cost and the regular sales, a special price of $14 will produce an additional contribution of $2.60 per unit from the additional 15000 units.

Increase in annual profit = increase in total contribution = 15000 x $2.60 = $39000

The inferior products could be sold at a minimum price equal to the variable cost of producing the products.

The minimum price = $11.40

Sales $    14.00 Direct Material $       5.10 Direct labor $       3.80 Variable manufacturing overhead $       1.00 Variable selling and admin expense $       1.50 Total Variable cost $    11.40 Contribution per unit $       2.60

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