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 87,600 units per year is: Direct materials $ 1.60 Direct labor $ 3.00 Variable manufacturing overhead $ .90 Fixed manufacturing overhead $ 4.35 Variable selling and administrative expenses $ 1.60 Fixed selling and administrative expenses $ 2.00 The normal selling price is $26 per unit. The company’s capacity is 115,200 units per year. An order has been received from a mail-order house for 2,300 units at a special price of $23.00 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

Answer:

1) Since the Company's capacity is 115,200 Units and companies current activity level is 87,600 Units. Hence the balance is idle capacity of the company at present.

If they accept order, they will utilize their idle capacity into profit.

since the special order will not change company's total fixed cost, hence for accepting or rejecting this order fixed cost is irrelevant because there will not change in fixed cost whether company accept or reject the order.

Only Relevant Cost for accepting or rejecting is companies varaible cost for making special order units.

If Revent Variable Cost per unit is less than the Special Price per unit of offer, the special order should be accept.

Hence we need to calculate variable cost per unit to make one unit of special order:

Direct Material Per Unit

$1.60

Direct Labor Per Unit

$3.00

Variable manufacturing overhead

$0.90

Variable selling and administrative expenses

$1.60

Total Variable Cost per unit

$7.10

Variable Cost per unit comes only $7.10 per unit

Selling Price per unit of special order = $23

Special Order should be accepted.

By accepting the special order, the companies profit will be incrased by ($23 - $7.10) x 2,300 Units = $36,570

2)

In this case, company already have 500 Units of this product left over from last year and that are INFERIOR means no use....It will be goods if it will sell on the variable cost per unit which was incurred by the company in making this project is $7.10 per unit as calculated above.

Hence the minimum selling price for these units = $7.10 per unit

Direct Material Per Unit

$1.60

Direct Labor Per Unit

$3.00

Variable manufacturing overhead

$0.90

Variable selling and administrative expenses

$1.60

Total Variable Cost per unit

$7.10

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