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 94,800 units per year is: The normal selling price is $23 per unit. The company's capacity is 122,400 units per year. An order has been received from a mail-order house for 2,300 units at a special price of $20.00 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.)

Explanation / Answer

Variable cost per unit

Direct materials

$1.80

Direct labor

2.00

Variable manufacturing overhead

    .80

Variable selling and administrative

1.40

Total variable cost per unit

$6.00

Annual profits will increase by (20 – 6)2,300

= $32,200

2) Relevant cost per unit = $1.40

Since only variable selling expenses will be incurred

Direct materials

$1.80

Direct labor

2.00

Variable manufacturing overhead

    .80

Variable selling and administrative

1.40

Total variable cost per unit

$6.00

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