Question

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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 Direct materials $ 2.30 Direct labor $ 2.00 Variable manufacturing overhead $ .60 Fixed manufacturing overhead $ 3.95 Variable selling and administrative expenses $ 1.80 Fixed selling and administrative expenses $ 1.00 The normal selling price is $20 per unit. The company's capacity is 111,600 units per year. An order has been received from a mail-order house for 1,500 units at a special price of $17.00 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.) Annual profits would by 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

Answer 1

Revenue from special order = 1500*17 = 25,500 Relevant cost of making these units = (Direct materials 2.30+Direct Labor 2 + Vmoh 0.60 + Variable selling and administrative expenses 1.80)* 1500 = 6.70 * 1500 = 10,050 Increase in annual profit = Revenue - Relevant cost = 25,500 - 10,050 Annual profits would increase by $15,450

Relevant cost per unit = $1.80 (Variable selling and administrative expenses. All other costs are sunk)