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 105,600 units per year is: Direct materials Direct labor Variable manufacturing overhead Fixed manufacturing overhead Variable selling and administrative expenses Fixed selling and administrative expenses $ 2.30 $ 2.00 $ 0.60 $ 3.65 $ 1.90 $ 1.00 The normal selling price is $23.00 per unit. The company's capacity is 138,000 units per year. An order has been received from a mail- order house for 2,700 units at a special price of $20.00 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.

AB G. H Answer Part 1) The financial advantage of accepting the offer = offer revenue - relevant cost for offer = (20*2700)-((2.3+2+.6+1.9) *2700) = 54000 - 18360 = $ 35640 Thus the correct answer financial advantage = $ 35640 Part 2) The minimum selling price for inferior goods = relevant cost to sell = variable selling expenses = $1.9 Thus the correct answer is Relevant cost per unit = $ 1.9 Explanation Since the goods has already been produced, so the cost incurred to produce is sunk, the only relevant cost is variable selling and administrative expense = $ 1.9