Question

2018-7-9 Inclusive Access 2018-7-9 instructions I help 4.5 Chapter 7 & 8 Homework Save & Exit Submit Question 4 (of 11) 4. velue 5.45 points Exercise 7-9 Special Order [LO7-4 Delta Company produces a single product. The cost of producing and selling a single unit of this product at the company's nomal activity level of 60,000 units per year is $5.10 $ 3.80 $ 1.00 $4.20 $1.50 $2.40 Direct materials Direct labor Variable manufacturing overhead Fixed manufacturing overhead Variable selling and administrative expense Fixed selling and administrative expense 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. Required: 1. If the order is accepted, by how much will annual profits be increased or decreased? (The order will not change the company's total fixed costs.) Annual profit would by 2. Assume the company has 1,000 units of this product left over from last year 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? (Round your answer to 2 decimal places.) Relevant cost per unit eBook & Resources References

Answer 1

1.

Analysis of special order

Sales revenue (15,000 x 14)	210,000
Costs:
Direct material (15,000 x 5.10)	- 76,500
Direct labor (15,000 x 3.80)	- 57,000
Variable manufacturing overhead (15,000 x 1)	- 15,000
Variable selling and administrative expenses (15,000 x 1.50)	- 22,500
Net income	$39,000

Annual profit would increase by $39,000

2.

The relevant unit cost for establishing the minimum selling price of the defective units is the variable selling and administrative expense.

Production cost is not relevant here since it is sunk cost and fixed selling and administrative cost is also not relevant since it will not be affected by the sale of defective units.

Relevant cost per unit = $1.50

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