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 92,400 units per year is: Direct materials Direct labor Variable manufacturing overhead Fixed manufacturing overhead Variable selling and administrative expenses $ 1.70 Fixed selling and administrative expenses S 2.00 S 2.20 $3.00 $ 1.00 S 5.15 The normal selling price is $25 per unit. The company's capacity is 115,200 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. 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. Annual profits would increase by $26790.

Fixed manufacturing overheads and fixed selling and administrative expenses will not change if special order is accepted and are hence irrelevant and not considered.

2. Relevant cost per unit: $1.70

The unit cost relevant for establishing a minimum selling price for the inferior units produced last year is the variable selling and administrative costs of $1.70 per unit. These are the only future costs that will have to be incurred for selling the units and hence are relevant. All other costs being sunk costs are irrelevant.

Note: There is no data in the question pertaining to b. regarding outside supplier's offer.

Per unit $ Selling price per unit $ 22.00 Less: Variable costs Direct materials 2.20 Direct labor 3.00 Variable manufacturing overhead 1.00 Variable selling and administrative expenses 1.70 Total variable costs 7.90 Contribution per unit $ 14.10 Number of units of special order 1900 Profit on special order $ 26790

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