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 Direct labor Variable manufacturing overhead Fixed manufacturing overhead Variable selling and administrative expenses Fixed selling and administrative expenses $ 1.50 $ 3.00 $ 0.70 $ 4.05 $ 1.90 $2.00 The normal selling price is $19.00 per unit. The company's capacity is 128,400 units per year. An order has been received from a mail- order house for 2,800 units at a special price of $16.00 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. The company does not expect the selling of these inferior units to have any effect on the sales of its current model. What unit cost is relevant for establishing a minimum selling price for these units?

Answer 1

1.when the special order does not affect the existing regular sales and production capacity , the relevant cost would be variable costs.fixed cost are not relevant as they are not affected by special order.

	not accepting special order	accepting special order	net increase(decrease) in net income
sales	0	$44,800 [2800units*$16]	$44,800
direct material	0	$4200[2800units*$1.50]	($4,200)
direct labor	0	$8400[2800units*$3]	($8,400)
variable manufacturing overhead	0	$1960[2800units*$0.70]	($1,960)
variable selling expense	0	$5320[2800units*$1.90]	($5,320)
		Net financial ADVANTAGE(DISADVANTAGE)	$24,920
			[44800-4200-8400-1960-5320]

There will be financial advantage of $24,920

2.The products are already manufactured. they are in inventory so the production cost(material+labor+overhead) are sunk cost as they are already incurred. They are not relevant here.

what is yet to be incurred is variable selling expense.

so here the relevant cost would be variable selling and administrative expense that is $1.90 per unit.

the minimum selling price should be $1.90