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 97,200 units per year is:

The normal selling price is $23.00 per unit. The company’s capacity is 127,200 units per year. An order has been received from a mail-order house for 2,500 units at a special price of $20.00 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?

Direct materials $ 1.80 Direct labor $ 3.00 Variable manufacturing overhead $ 1.00 Fixed manufacturing overhead $ 4.85 Variable selling and administrative expenses $ 1.80 Fixed selling and administrative expenses $ 2.00

Explanation / Answer

1 Incremental revenue 50000 =2500*20 Costs: Direct materials 4500 =2500*1.8 Direct labor 7500 =2500*3 Variable manufacturing overhead 2500 =2500*1 Variable selling and administrative expenses 4500 =2500*1.8 Total costs 19000 Financial advantage 31000 2 Relevant unit cost is Variable selling and administrative expenses which is $1.80 per unit

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