Delta Company produces a single product. The cost of producing and selling a sin
ID: 2501878 • 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 86,400 units per year is:
Direct materials $ 2.40
Direct labor $ 2.00
Variable manufacturing overhead $ 1.00
Fixed manufacturing overhead $ 3.35
Variable selling and administrative expenses $ 1.90
Fixed selling and administrative expenses $ 1.00
The normal selling price is $25 per unit. The company’s capacity is 117,600 units per year. An order has been received from a mail-order house for 2,600 units at a special price of $22.00 per unit. This order would not affect regular sales.
Required:
1. 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?
2.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?
Explanation / Answer
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 86,400 units per year is:
Contribution = Selling Price per unit $ 25.00
Less: Direct materials $ 2.40
Direct labor $ 2.00
Variable manufacturing overhead $ 1.00
Variable selling and administrative
expenses $ 1.90
Contribution per unit = $16.70
Total Contribution on 86400 units sale : $ 1,442,880
Fixed Cost = Fixed manufacturing overhead $ 3.35+Fixed selling and administrative expenses $ 1.00
Total Fixed Cost = 4.35 * 117600 = $511560 AS FIXED COST IS ESTABLISHED AT FULL CAPACITY.
Total Profit on 86400 units sale = $1442880 - total Fixed Cost = $1442880 -$ 511560 =$931320
(1) If the order of 2,600 units at a special price of $22 per unit is accepted, the total contribution of 2600 units sold = ($22-$16.70) * 2600 = $13700 will be the increase in annual profits, assuming that the order will not change the company’s total fixed costs & this order would not affect regular sales.
(2). The unit cost which are relevant for the establishing a minimum selling price for the 500 units which are inferior to the current model are the Variable Costs of $ 8.30 per unit. Assuming that the order will not change the company’s total fixed costs. As long these units could be sold at & above $8.30 per unit, the company willn't have to pay out of its pocket, so the minimum reduced prices for these units could be $8.30.
Related Questions
drjack9650@gmail.com
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.