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 $19.00 per unit. The company’s capacity is 128,400 units per year. An order has been received from a mail-order house for 2,800 units at a special price of $16.00 per unit. This order would not affect regular sales or the company’s total fixed costs.

Required:

1. What is the financial advantage (disadvantage) of accepting the special order?

2. As a separate matter from the special order, assume the company’s inventory includes 1,000 units of this product that were produced last year and 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?

Direct materials $ 2.40 Direct labor $ 3.00 Variable manufacturing overhead $ 0.90 Fixed manufacturing overhead $ 4.05 Variable selling and administrative expenses $ 1.20 Fixed selling and administrative expenses $ 2.00

Explanation / Answer

Per unit Total 2800 units Incremental revenue 16 44800 Incremental costs: Variable costs: Direct materials 2.4 6720 Direct labor 3 8400 Variable manufacturing overhead 0.9 2520 Variable selling and administrative expenses 1.2 18 Total variable cost 7.5 17658 Incremental net operating income(loss) 27142 Financial advantage = $27142 2 Relevant unit cost=Variable selling and administrative expenses = $1.20

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