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 99,600 units per year is:

The normal selling price is $22.00 per unit. The company’s capacity is 128,400 units per year. An order has been received from a mail-order house for 2,400 units at a special price of $19.00 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?

Direct materials $ 2.00 Direct labor $ 3.00 Variable manufacturing overhead $ 0.90 Fixed manufacturing overhead $ 3.45 Variable selling and administrative expenses $ 2.10 Fixed selling and administrative expenses $ 2.00

Explanation / Answer

1. What is the financial advantage (disadvantage) of accepting the special order?

As the special order is not affecting company's regular sales or the fixed costs, the financial advantage of accepting the special order would be the contribution from these special order.

i.e. Total selling price less total variable cost = $19 - ($2 + $3 + $0.90 + $2.10) = $19 - $8 = $11 per unit * 2400 units = $26400

Clearification is not given regarding variable selling and administration expenses, so it is included in unit cost.

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?

Total unit cost i.e. $13.45 is relevant for establishing a minimum selling price for these units.

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