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 99,600 units per year is: Direct materials Direct labor Variable manufacturing overhead Fixed manufacturing overhead Variable selling and administrative expenses Fixed selling and administrative expenses 1.50 3.00 0.60 3.35 $ 2.10 2.00 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 1,700 units at a special price of $1700 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? 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?

Explanation / Answer

Solution 1:

Solution 2:

Since the inventory of 1000 units produced last year are inferior, therefore cost alredy incurred is sunk cost. Further since the units must be sold through the regular channels, therefore the unit cost which is relevant for established the minimum selling price of these units is the Variable selling cost of these units, i.e. $2,10.

Financial advantage (disadvantage) of special order of 1,700 units Particulars Amount Selling price per unit $17.00 Revenue (1700* $17) (A) $28,900.00 Cost: Direct Material (1700 * $1.5) $2,550.00 Direct Labor (1700 * $3) $5,100.00 Variable Manufacturing overhead (1700* $0.60) $1,020.00 Variable Selling & Administrative Expense (1700*$2.10) $3,570.00 Total Cost (B) $12,240.00 Net Income (A-B) $16,660.00

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