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 $22 per unit. The company's capacity is 133,200 units per year. An order has been received from a mail-order house for 2,700 units at a special price of $19.00 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.) Relevant cost per unit

Explanation / Answer

Hey Dear Student !!

1) Calculation would be as follows:

Sale Price: $19 Per Unit
Total Variable Cost: Direct Material Cost + Direct Labour Cost + Variable Mfr Overhead + Variable Selling & Admin Exp

2.30 + 3.00 + 1 + 1.60= $ 7.90 per unit

Contribution: Selling Price - Variable Cost:
19 - 7.90 = $ 11.10 per unit

Profit on sale of 2700 Units
2700 X 11.10

$29970

So

Annual Profit would Increase by
$ 29970

2) Minimum Relevant Selling Price for the sale of inferior Units would be its Variable Cost per unit because Fixed Cost is Always considered irrelevant unless it is avoidable due to decision. So Minimum Sale Price is $ 7.90 per unit as calculated above.

So

Minimum Relevant Cost per unit is $7.90

Pleasure Teaching you !!   

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