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 85,200 units per year is: Direct materials Direct labor Variable manufacturing overhead Fixed manufacturing overhead Variable selling and administrative expenses Fixed selling and administrative expenses $ 1.60 $ 4.00 $ 0.70 $ 3.65 $ 1.50 $ 3.00 The normal selling price is $22.00 per unit. The company's capacity is 106,800 units per year. An order has been received from a mail-order house for 1,800 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. 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

The answer has been presented in the supporting sheet. For detailed answer refer to the supporting sheet.

A B C E F G H I J K L D answer 3 Part 1) + Financial /(disadvantage) of accepting the offer is 5 = Offer revenue - relevant cost for offer 5 = (19*1800) - (variable cost for 1800 units) 7 = 19*1800) - ((1.6+4+.7+1.5) *1800) 3 = $ 20160 o Thus the financial advantage of $ 20160 2 Part 2) The cost already incurred on the production of inferior goods are sunk and irrelevant. The only relevant cost is variable selling and admminstrative cost of $ 1.5 per unit, as these are yet to be incurred. 5 Thus the correct answer is $ 1.5 per unit cost of variable selling and adminstrative cost is relevant for minimum selling price.