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 92,400 units per year is:

Direct materials $ 2.10

Direct labor $ 3.00

Variable manufacturing overhead $ 0.90

Fixed manufacturing overhead $ 3.65

Variable selling and administrative expenses $ 1.40

Fixed selling and administrative expenses $ 2.00

The normal selling price is $22.00 per unit

The company’s capacity is 117,600 units per year. An order has been received from a mail-order house for 2,100 units at a special price of $19.00 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?

Explanation / Answer

Per unit Total 2100 units Incremental revenue 19 39900 Incremental costs: Direct materials 2.1 4410 Direct labor 3 6300 Variable manufacturing overhead 0.9 1890 Variable selling and administrative expenses 1.4 2940 Total Incremental costs 15540 Incremental net operating income(loss) 24360 Ffinancial advantage $24360 2 Releavnt unit cost = Variable selling and administrative expenses = $1.40

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