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 84,000 units per year is Direct materials Direct labor Variable manufacturing overhead Fixed manufacturing overhead Variable selling and administrative expense Fixed selling and administrative expense $1.90 S4.00 S 70 S 4.15 S 1.70 S3.00 The normal selling price is $24 per unit. The company's capacity is 99,600 units per year. An order has been received from a mail-order house for 1,300 units at a special price of S21.00 per unit. This order would not affect regular sales. Required: 1. If the order is accepted, by how much will annual profits be increased or decreased? (The order will not change the company's total fixed costs.) profits would 2. Assume the mpany has 500 units of this product left over rom as ear hat are nferiorto the cu ent model The units must be s establishing a minimum selling price for these units? (Round your answer to 2 decimal places.) throug re ular channel at reduced ces. w a un costs relevant or t cost per unit

Explanation / Answer

1.

Selling price for special order = $21

Total variable costs of one unit = $1.90 + $4 + $0.70 + $1.70 = $8.30

Contribution per unit from special order = Selling price per unit - Total variable costs per unit = $21 - $8.30 = $12.70

Number of units to be sold on special order = 1,300

Thus,

Total increase in the company's contribution margin = $12.70 x 1,300 = $16,510

Since the company has excess capacity fixed costs will not change if the special order is accepted. Therefore, the increase in annual profits if the order is accepted would be equal to the increase in contribution margin.

Hence,

Annual profits would increase by $16,510

2.

Only the variable selling and administrative costs would be relevant to sell the inferior units because these units have already been produced and the manufacturing costs are now sunk costs.

Therefore,

Relevant cost per unit = $1.70

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