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 Direct materials Direct labor Variable manufacturing overhead Fixed manufacturing overhead Variable selling and administrative expenses $1.20 Fixed selling and administrative expenses 2.00 $2.10 $3.00 $ .70 $4.25 The normal selling price is $21 per unit. The company's capacity is 110,400 units per year. An order has been received from a mail-order house for 2,100 units at a special price of $18.00 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 by 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

1) The increase in annual profits would be equal to the additional contribution earned from the special order. Price per unit under the special order = $          18.00 Variable expenses per unit = 2.10+3.00+0.70+1.20 = $             7.00 Contribution per unit of the special order $          11.00 ANNUAL PROFITS WOULD INCREASE BY (2100*$11) = $        23,100 2) As the cost of production of the inferior units is a sunk cost, the cost of production is irrelevant, What is relevant is the variable selling and administrative expenses per unit of $1.20. RELEVANT COST PER UNIT $             1.20

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