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 S 2.00 Fixed selling and administrative expenses 2.00 $ 2.40 S 3.00 S .50 S 3.85 The normal selling price is $18 per unit. The company's capacity is 102,000 units per year. An order has been received from a mail-order house for 1,400 units at a special price of $15.00 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.) l 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.) cost

Explanation / Answer

1.If the order is accepted, by how much will annual profits increase/decrease?

The annual profit would “INCREASE” by “$9,940”

Incremental Sales           = 1400 units x $15 per unit = $21,000

Incremental Costs = 1400 Units x ($2.4 + $3 + $0.50 + $2)

= 1400 x $7.9

= $11,060

Therefore,Incremental Profit would be $9,940 ($21000 - $11,060)

The annual profit would “INCREASE” by “$9,940”

2.Relevent cost per Unit = $2 per unit

The relevant cost per unit is $2 (Variable selling and administrative expenses).

All other variable costs are sunk costs. The fixed costs are not relevant because they will not change in total.

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