Exercise 12-9 Special Order [LO12-4] Delta Company produces a single prcduct. Th

Question

Exercise 12-9 Special Order [LO12-4] Delta Company produces a single prcduct. The cost of producing and selling a single unit of this product at the company's normal activity level of 91,200 units per year is: Direct materials S1.90 3.00 Direct labor Variable manufacturing overhead S.60 Fixed manufacturirg overhead S 465 Variable selling and administrative expenses Fixed selling and administrative 2.00 expenses The normal selling price is $19 per unit. The company's capacity is 118,800 units per year. An crder has been received from a mail-order house for 2,300 units at a special price of $16.00 per unit. This order would not affect regular sales. Required 1. If the crder is accepted, by how much will annual profits be increased cr decreasec? (The order will not change the company's total fixed costs.) Annual profits wou d by

Explanation / Answer

SOLUTION

(B) The relevant cost is $1.20 (the variable selling and administrative costs). All other variable costs are sunk, since the units have already been produced. The fixed costs would not be relevant,since they will not be affected by the sale of leftover units.

Amount ($) Amount ($) Selling price (A) 16.00 Direct materials 1.90 Direct labor 3.00 Variable manufacturing overhead 0.60 Variable selling and administrative expense 1.20 Total variable expenses (B) 6.70 Contribution margin (C=A-B) 9.30 Units sold (D) 2,300 Total contribution margin (C*D) 21,390

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