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 93,600 units per year is:

The normal selling price is $25 per unit. The company’s capacity is 116,400 units per year. An order has been received from a mail-order house for 1,900 units at a special price of $22.00 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 93,600 units per year is:

Explanation / Answer

1. If the order is accepted, only variable costs must be considered in the total cost of the product as the order will not change the company’s total fixed costs.

Therefore, the total costs considered = Direct Material $1.6 + Direct Labour $3 + Variable manufacturing overhead $0.6 + Variable selling and administrative expenses $1.6 = $6.8

Profit = Sales - Total Cost = 1900 * ($22 - $6.8) = $28880

Hence, the annual profits will be increased by $28880.

2. The total cost incurred to manufacture the left over 500 units of this product = Direct Material $1.6 + Direct Labour $3 + Variable manufacturing overhead $0.6 = $5.2

These goods however require additional variable expenses of $1.6 for the purpose of sale. So, the minimum selling price, i.e., Break-Even Price for these goods is their total cost incurred in order to recover the those incurred costs.

Hence, the minimum selling price for a unit = $5.2 + $1.6 = $6.8

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