Delta Company produces a single product. The cost of producing and selling a sin
ID: 2570115 • Letter: D
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 93,600 units per year is: Direct materials $ 2.00 Direct labor $ 4.00 Variable manufacturing overhead $ .90 Fixed manufacturing overhead $ 3.85 Variable selling and administrative expenses $ 1.20 Fixed selling and administrative expenses $ 3.00 The normal selling price is $19 per unit. The company’s capacity is 108,000 units per year. An order has been received from a mail-order house for 1,200 units at a special price of $16.00 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.) 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?
Explanation / Answer
Answer 1. Statement of Incremental Profit (Loss) If Special order - 1200 Units is Accepted Incremental Revenue: Sales - 1,600 Units X $16 25,600 Incremental Costs: Direct Material - 1,600 Units X $2 3,200 Direct Labor - 1,600 Units X $4 6,400 Variable MOH - 1,600 Units X $0.90 1,440 Variable Selling & Admn. Exp. - 1,600 Units X $1.20 1,920 12,960 Net Incremental Profit (Loss) 12,640 Answer 2. Relevant Cost per Unit - Variable Selling & Admn. Exp. 1.20 All other variable costs are sunk cost as they are already incurred. Fixed Costs are not relevant, because they will not change whether inferior goods are sold or not.
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