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 88,800 units per year is:

Direct materials	$	2.00
Direct labor	$	3.00
Variable manufacturing overhead	$	.90
Fixed manufacturing overhead	$	4.85
Variable selling and administrative expenses	$	1.60
Fixed selling and administrative expenses	$	2.00

The normal selling price is $25 per unit. The company’s capacity is 124,800 units per year. An order has been received from a mail-order house for 3,000 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.) 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

Solution 1:

Computation of financial advantage (Disadvantage) from special order
Particulars	Amount
Revenue from Special order	$66,000.00
Relevant Costs:
Direct materials	$6,000.00
Direct labor	$9,000.00
Variable manufacturing overhead	$2,700.00
Variable selling and administrative expenses	$4,800.00
Financial advantage (disadvantage) on acceptance of special order	$43,500.00

annual profits would increase by $43,500

Solution 2:

The relevant unit cost is $1.60 (Variable selling expenses). All other variable costs are sunk,as the units have already been produced and cost already incurred. The fixed costs would not be relevant, as they will not be affected by the sale of leftover units