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 90,000 units per year is Direct materials Direct labor Variable manufacturing overhead Fixed manufacturing overhead Variable selling and administrative expenses $ 1.90 Fixed selling and administrative expenses 2.00 $ 2.40 $ 3.00 $1.00 $ 4.25 The normal selling price is $23 per unit. The company's capacity is 112,800 units per year. An order has been received from a mail-order house for 1,900 units at a special price of $20.00 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.) nnual profits would 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? (Round your answer to 2 decimal places.) Relevant cost per unit

Explanation / Answer

Total Capacity 112800 Normal Capacity 90000 Costs Relevant to Decision Direct Material 2.40 Yes Direct Labor 3.00 Yes Variable MOH 1.00 Yes Fixed MOH 4.25 Sunk Cost (Not Relevant) Variable S&A 1.90 Yes Fixed S&A 2.00 Sunk Cost (Not Relevant) 14.55 Since idle capacity is available, no question of including Opportunity cost 1 Total Relevant Cost: 8.30 Special offer Price 20.00 Net Benefit PU 11.70 (20-8.30) Units 1900 Net Benefit Total 22230 (11.70*1900) (Increase) 2 Since the costs on the 500 defective units has already been incurred; The Production relevent cost is Nil The cost is Sunk for the decision Relevant Cost: Of Production 0.00 Of Selling(Variable S&A) 1.90 Total Relevant Cost 1.90

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