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 87,600 units per year is Direct materials Direct labor Variable manufacturing overhead Fixed manufacturing overhead Variable selling and administrative expenses Fixed selling and administrative expenses $ 2.00 $ 4.00 $ 0.60 $ 3.85 $ 1.90 $ 3.00 points Skipped eBook The normal selling price is $20.00 per unit. The company's capacity is 120,000 units per year. An order has been received from a mail- order house for 2,700 units at a special price of $1700 per unit. This order would not affect regular sales or the company's total fixed costs Print 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? References Complete this question by entering your answers in the tabs below Required 1 Required 2 What is the financial advantage (disadvantage) of accepting the special order? Required 1 Required 2 Financial (disadvantage) Financial advantage

Explanation / Answer

1. What is the financial advantage (disadvantage) of accepting the special order?

Financial advantage = “ INCREASE” in profit by “$22,950”

Incremental Sales = 2700 units x $17 per unit = $45,900

Incremental Costs = 2700 Units x ($2.00 + $4.00 + $0.60 + $1.90)

= 2700 x $8.50

= $22,950

Therefore, Incremental Profit would be $22,950 ( = $45,900 - $22950)

The annual profit would “INCREASE” by “$22,950”

2.Relevant for establishing a minimum selling price = $1.90 per unit

The relevant cost per unit is $1.90 (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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