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 106,800 units per year is: Direct materials $1.80 Direct labor $2.00 Variable manufacturing overhead $1.00 Fixed manufacturing overhead $3.45 Variable selling and administrative expenses $1.90 Fixed selling and administrative expenses $1.00 The normal selling price is $20.00 per unit. The company's capacity is 128,400 units per year. An order has been received from a mail- order house for 1,800 units at a special price of $17.00 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? Required 1 Required 2 >

Answer 1

1.

Analysis of special order

Sales revenue (1,800 x 17)	30,600
Costs:
Direct material (1,800 x 1.80)	- 3,240
Direct labor (1,800 x 2)	- 3,600
Variable manufacturing overhead (1,800 x 1)	- 1,800
Variable selling and administrative expenses (1,800 x 1.90)	- 3,420
Net income	$18,540

Financial advantage of accepting the special order = $18,540

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 unit cost = $1.90

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