Question

Exercise 11-9 Special Order Decision (LO11-4] 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 60,000 units per year is: Direct materials Direct labor Variable manufacturing overhead Fixed manufacturing overhead Variable selling and administrative expense Fixed selling and administrative expense $ 5.10 $ 3.80 $ 1.00 $ 4.20 $ 1.50 $ 2.40 The normal selling price is $21 per unit. The company's capacity is 75,000 units per year. An order has been received from a mail-order house for 15,000 units at a special price of $14.00 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? Complete this question by entering your answers in the tabs below. Required 1 Required 2 What is the financial advantage (disadvantage of accepting the special order? Financial advantage

Answer 1

Calculation of financial advantage and relevant cost perf unit:

Α B Per unit ($) 14 c Total Amount (S) (for 15,000 units) =15000*B2 5.1 3.8 1=15000*B4 =15000*B5 Particulars 2 Incremental revenue 3 Incremental costs: 4. Direct materials 5 Direct labor Variable manufacturing 6 overhead Variable selling and 7 administrative expenses 8 Total Incremental costs Incremental net operating 9 income/(loss) 10 Financial advantage 11 Relevant cost per unit =15000*B6 =15000*B7 =SUM(C4:07) =C2-C8 =C9 =B7

Results of the excel sheet are as follows:

A в Per unit (S) Total Amount (S) (for 15,000 units) 210000 5.1 76500 570001 3.8 Vario 15000 Particulars 2 Incremental revenue 3 Incremental costs: 4 Direct materials 5 Direct labor Variable manufacturing 6 overhead Variable selling and 7 administrative expenses 8 Total Incremental costs Incremental net operating 9 income/(loss) 10 Financial advantage 11 Relevant cost per unit 1.5 22500 171000 39000 $39,000 $1.5

Make or Buy decision:

Ε A Per Unit Relevant Costs For 30,000 units Particulars Make Buy Make Buy 3 Cost of Purchasing =30000*C3 4 Cost of Making: 5 Direct materials 3.6 =30000*B5 6 Direct labor =30000*B6 7 Variable overhead 2.4 =30000*B7 8 Fixed overhead =9*(1/3) =30000*B8 9 Total cost =SUM(B3:B8)]=SUM(C3:C8)=SUM(D3:08)=SUM(E3:E8) 10 Opportunity cost 11 Financial advantage of accepting outside supplier's offer =(D9+D10)-E9 10 80000

Results of the excel sheet are as follows:

2 Α Per Unit Relevant Costs For 30,000 units Particulars Make Buy Make Buy 3 Cost of Purchasing 21 630000 4 Cost of Making: 5 Direct materials 3.6 108000 6 Direct labor 101 300000 7 Variable overhead 2.4 72000 8 Fixed overhead 3 90000 9 Total cost 21 570000 630000 10 Opportunity cost 80000 11 Financial advantage of accepting outside supplier's offer $20,000