Delta Company produces a single product. The cost of producing and selling a sin
ID: 2476575 • Letter: D
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 90,000 units per year is:
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 2,100 units at a special price of $23.00 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 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.)
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 90,000 units per year is:
Explanation / Answer
1.
Compuation of Incremental Profit
Particulars
Amount
No of units
2,100
Selling Price
$ 23.00
Less : Variable Cost
Direct Material
$ 1.80
Direct Labor
$ 3.00
Variable Manufacturing Overhead
$ 0.90
Variable selling and administrative expenses
$ 1.90
Total Variable Cost
$ 7.60
Contribution Per unit
$ 15.40
Total Contribution
$ 32,340.00
If the order is accepted, the annual profits will be increased by $ 32,340
2.
The relevant cost is $1.90 (the variable selling and administrative costs). As the units have already been produced, all other variable costs are sunk. Fixed cost will not be affected by the sale of leftover units.So it is irrelevant.
Compuation of Incremental Profit
Particulars
Amount
No of units
2,100
Selling Price
$ 23.00
Less : Variable Cost
Direct Material
$ 1.80
Direct Labor
$ 3.00
Variable Manufacturing Overhead
$ 0.90
Variable selling and administrative expenses
$ 1.90
Total Variable Cost
$ 7.60
Contribution Per unit
$ 15.40
Total Contribution
$ 32,340.00
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