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 106,800 units per year is Direct materials Direct labor Vari $2.20 $4.00 able manufacturing overhead Fixed manufacturing overhead $ .80 $3.95 Variable selling and administrative expenses $ 1.50 Fixed selling and administrative expenses 3.00 The normal selling price is $25 per unit. The company's capacity is 122,400 units per year. An order has been received from a mail-order house for 1,300 units at a special price of $22.00 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.) nual profits would 2. Assume the company has 500 units of this product left over from last year 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? (Round your answer to 2 decimal places.) Relevant cost per unit

Explanation / Answer

1. The only costs that are relavent in decision making are the variable costs. As the order will not change the company's fixed costs, fixed costs are irrelavent.

Order price = 22 per unit

Variable costs = Direct material + Direct labour + Variable manufacturing overhead + Variable selling and administrative expenses = 2.2 + 4 + 0.8 + 1.5 = 8.5

Profit from order = Selling price - Variable costs = 22 - 8.5 = 13.5

Annual profits would Increase by 17,550(13.5*1,300)

2.

Relavent costs for establishing a minimum selling price are the variable costs

Variable costs = Direct material + Direct labour + Variable manufacturing overhead + Variable selling and administrative expenses = 2.2 + 4 + 0.8 + 1.5 = 8.5

Minimum selling price = 8.5

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