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 85,200 units per year is:

The normal selling price is $19 per unit. The company’s capacity is 121,200 units per year. An order has been received from a mail-order house for 3,000 units at a special price of $16.00 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.)

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 85,200 units per year is:

Explanation / Answer

Ans 1. Here we shall consider the marginal contribution from manufacture of addotional 3000 units of the product as the fixed cost does not change for these units.

Ans 2. The costing for these inferior products to be sold at reduced prices should be done only at variable cost.

Ans 1. Marginal contribution from additional 3000 units. $ Sales revenue (3000 units @ $ 16 per unit) 48000 (-) Expenses Direct materials (3000 units @ $ 1.9) 5700 Direct labour (3000 units @ $ 3) 9000 Variable Mfg Ovh (3000 units @ $ 0.6) 1800 Marginal contribution 31500 Note: Variable selling & distribution overhead is not charged as the order has been received through a mail house.

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