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 104,400 units per year is:

2.00

The normal selling price is $26 per unit. The company’s capacity is 133,200 units per year. An order has been received from a mail-order house for 2,400 units at a special price of $23.00 per unit. This order would not affect regular sales.

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.)

(Please answer in the format of - Annual profits would decrease/increase by ____)

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?

2. Relevant cost per unit =

  Direct materials $ 2.20   Direct labor $ 3.00   Variable manufacturing overhead $ .80   Fixed manufacturing overhead $ 4.75   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 133,200 units per year. An order has been received from a mail-order house for 2,400 units at a special price of $23.00 per unit. This order would not affect regular sales.

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.)

(Please answer in the format of - Annual profits would decrease/increase by ____)

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?

2. Relevant cost per unit =

Explanation / Answer

1)

As there is no increase in fixed cost and the regular sales will remain unaffected, the increase in annual income for the sale of additional 2400 units = increase in the total contribution = $36960

2)

The 500 units shlould be sold at a price equal to the variable cost of sales of the units.

The relevant price at which the inferior 500 units should be sold = Direct materials + Direct labour + variable manufacturing overhead + variable seling and administrative expenses (as the unis must be sold through regular sales channels) = $2.20 + $3.00 + $0.80 + $1.60 = $7.60 per unit

Particulars $ $ Selling price per unit 23 Direct materials 2.20 Direc Labour 3.00 Variable manufacturing Overhead 0.80 Variable selling and administrative expenses 1.60 7.60 Contribution per unit of the additional order 15.40 Number of additional units 2400 Total additional contribution 36960

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