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 100,800 units per year is

The normal selling price is $19 per unit. The company’s capacity is 128,400 units per year. An order has been received from a mail-order house for 2,300 units at a special price of $16.00 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.)

  Direct materials $ 2.00   Direct labor $ 3.00   Variable manufacturing overhead $ .80   Fixed manufacturing overhead $ 5.25   Variable selling and administrative expenses $ 1.80   Fixed selling and administrative expenses $ 2.00

Explanation / Answer

1. As the fixed cost will not be affected by the special order so cost per unit

Selling price per unit - $16

Total Cost per unit - $7.60

Profit per unit = $8.4 per unit

Total increase in the profit = 8.4 * 2,300 = $19,320

2. Minimum selling price for the units will be the cost price of the product ,

So the minimum selling price should be $14.85 to atleast cover all its cost

Direct material $2 Direct labor $3 Variable manufacturing $.80 Variable selling and administrative $1.80 Total cost per unit $7.60

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