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 103,200 units per year is: Direct materials Direct labor Variable manufacturing overhead Fixed manufacturing overhead Variable selling and administrative expenses Fixed selling and administrative expenses $ 2.00 $ 3.00 $ 1.00 $ 4.85 $ 1.60 $ 2.00 The normal selling price is $23.00 per unit. The company's capacity is 118,800 units per year. An order has been received from a mail-order house for 1,300 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

1 Calculating Financial Advantage / Disadvantage ) Particulars Units P.U Amout Sales 1300 $20.00 $26,000 Cost : Material 1300 $ 2.00 $ 2,600 Labour 1300 $ 3.00 $ 3,900 Variable Manufacturing 1300 $ 1.00 $ 1,300 Variable Selling & Adm 1300 $ 1.60 $ 2,080 Total cost 1300 $ 7.60 $ 9,880 Financial Advantage $ 16,120 >> Fixed cost is not considered for special order. 2 >> If 1000 units were in inventory which are produced in previous year, the it can be sold with minimum variable cost. Fixed cost is not considered Minimum selling price = $ 7.6 Material $2.00 Labour $3.00 Variable Manufacturing | $1.00 Variable Selling & Adm $1.60 Total cost $7.60