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 98,400 units per year is:

Direct materials	$	1.60
Direct labor	$	3.00
Variable manufacturing overhead	$	0.70
Fixed manufacturing overhead	$	4.95
Variable selling and administrative expenses	$	1.30
Fixed selling and administrative expenses	$	2.00

The normal selling price is $25.00 per unit. The company’s capacity is 117,600 units per year. An order has been received from a mail-order house for 1,600 units at a special price of $22.00 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. What unit cost is relevant for establishing a minimum selling price for these units?

Answer 1

1
	Per unit	Total 1600 units
Incremental revenue	22.00	35200
Incremental costs:
Direct materials	1.60	2560
Direct labor	3.00	4800
Variable manufacturing overhead	0.70	1120
Variable selling and administrative costs	1.30	2080
Total Incremental costs		10560
Incremental net operating income(loss)		24640
Financial advantage $24640
2
Relevant cost per unit = Variable selling and administrative costs = $1.30