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:

The normal selling price is $24 per unit. The company’s capacity is 128,400 units per year. An order has been received from a mail-order house for 2,400 units at a special price of $21.00 per unit. This order would not affect regular sales.

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.)

   

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.)

     

    

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:

Explanation / Answer

Answer 1

Note for undertanding : In case of special order the regular fixed costs are not be consider as they are irrevant in dertermining the profitability from special order

Computation of Incremental profits or loss from Special order

Answer : Thus if the order is accepted, by how much will annual profits be increased by $ 32,640.

Answer 2

Note for undertanding : In determining minimum selling price under relavant costing sunk cost & fixed cost are not to be consider. In the given question those 500 units are already produced thus all the manufacting cost ie Direct material , Direct labour , Variable manufacturing overhear are to be ignored as they are historical cost or sunk cost now. Fixed manufacturing overhead & Fixed selling and administrative expenses are anways to be ignored.

Thus , Variable selling and administrative expenses per unit = Revelant cost per unit = $1.10

Answer : Revelant cost per unit = $1.10  

Details Amount ($) Selling Price per unit 21.00 Less : Direct materials per unit (1.60) Less : Direct labor (4.00) Less : Variable manufacturing overhead (0.70) Less :Variable selling and administrative expenses (1.10) Incremental Profit per unit 13.60 * Units in special order 2,400 units Total Incremental Profit $32,640

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