Delta Company produces a single product. The cost of producing and selling a sin
ID: 2488003 • 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 92,400 units per year is:
The normal selling price is $24 per unit. The company’s capacity is 126,000 units per year. An order has been received from a mail-order house for 2,800 units at a special price of $21.00 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.)
Annuals profits would 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? (Round your answer to 2 decimal places.)
Relevant cost per unit #?
Direct materials $ 2.30 Direct labor $ 2.00 Variable manufacturing overhead $ .80 Fixed manufacturing overhead $ 3.65 Variable selling and administrative expenses $ 1.40 Fixed selling and administrative expenses $ 1.00Explanation / Answer
1.Current year profit Before Acceptance After Acceptance
Total Sales $22,176,00(92400*24) 2,276,400(92400*24+2800*21)
Less:Variable cost $600,600 618,800 ($92,400*6.5(2.3+2+0.8+1.4)) ($95,200*6.5(2.3+2+0.8+1.4)) Contribution per unit $1,617,000 $1,657,600
Increase in annual profit will be $1,657,600-1,617,000=$40,600
Note:Fixed cost is ignored because fixed cost remains constant irrespecive of level of output.
It will no affect our decision.
2)The unit that are inferior to the current model should be sold at a price that it should cover variable cost
because fixed cost remains constant irrespecive of level of output.
Therefore,It should be sold at a price that cover variable cost.
Answer is $6.5(2.3+2+0.80+1.4)
Cost per unit is $6.5
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