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 94,800 units per year is: Direct materials $ 2.10 Direct labor $ 4.00 Variable manufacturing overhead $ 0.80 Fixed manufacturing overhead $ 4.55 Variable selling and administrative expenses $ 2.00 Fixed selling and administrative expenses $ 3.00 The normal selling price is $18.00 per unit. The company’s capacity is 118,800 units per year. An order has been received from a mail-order house for 2,000 units at a special price of $15.00 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?

Explanation / Answer

1.What is the financial advantage (disadvantage) of accepting the special order varible cost per unit for the purcpose of Special order does not include variable Selling & Admin Expenses. Variable cost per unit Direct materials $       2.10 Direct labour $       4.00 variable manufacturing over head $       0.80 $       6.90 Incresemenatl revenue per Unit Sale price per unit $     15.00 Less: varible costs per unit $       6.90 Incremental Revenue per uNit $       8.10 Incremental revenue For Special order =2000 Units * $8.10 =$16200 2 What unit cost is relevant for establishing a minimum selling price for these units? 1000 Units from the last year production and these are Inferior to the current Model. Then minimum Selling price for these units is prodcution cost. production cost =$2.10+$4.00+$0.80+$4.55 =$11.45 Per unit Minimum selling per unit for these 1000 Units =production cost including Fixed cost =$11.45

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