Delta Company produces a single product. The cost of producing and selling a sin
ID: 2595667 • 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 96,000 units per year is:
Direct materials Direct labor Variable manufacturing overhead Fixed manufacturing overhead Variable selling and administrative expenses Fixed selling and administrative expenses 2.30 3.00 $ 0.60 4.05 $ 1.20 $ 2.00 The normal selling price is $25.00 per unit. The company's capacity is 108,000 units per year. An order has been received from a mail- order house for 1,000 units at a special price of $22.00 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? Complete this question by entering your answers in the tabs below. Required 1 Required 2 What is the financial advantage (disadvantage) of accepting the special order? Financial advantageExplanation / Answer
Answer:
1
Per
unit
Total
for 1000
units
Sales
22
22000
less:
Direct materials
2.3
2300
Direct labor
3
3000
Variable manufacturing overhead
0.6
600
Variable Selling and
admin
2.1
2100
Total Incremental cost
8
8000
Total Incremental Profit
14
14000
Annual profit will be increased by $14,000
Note: here we will not consider the fixed cost because it is irrelevancy for this decision
________________________________
2
The relevant cost will be equal to Variable Selling and admin=$2.10
Explanation:
because units have already been produced so other variable cost will be considered as sunk cost and it is not relevant for this decision so only relevant cost will be equal to Variable Selling and admin=$2.10
Per
unit
Total
for 1000
units
Sales
22
22000
less:
Direct materials
2.3
2300
Direct labor
3
3000
Variable manufacturing overhead
0.6
600
Variable Selling and
admin
2.1
2100
Total Incremental cost
8
8000
Total Incremental Profit
14
14000
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