Question

Exercise 1

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 99,600 units per year is:

Direct materials	$	2.30
Direct labor	$	4.00
Variable manufacturing overhead	$	.50
Fixed manufacturing overhead	$	3.85
Variable selling and administrative expense	$	1.50
Fixed selling and administrative expense	$	3.00

The normal selling price is $21 per unit. The company’s capacity is 133,200 units per year. An order has been received from a mail-order house for 2,800 units at a special price of $18.00 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.)

1.   Annual profits would_____________ by_________________

2. Assume the company has 500 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.)

1.   Relevant cost per unit = _________________   

Answer 1

1) Annual profits will increase $18,760

Working:

	Per unit		2800 Units
Incremental sales	15		42000
Incremental costs:
Direct materials	2.3	6440
Direct labor	4	11200
Variable manufacturing overhead	0.5	1400
Variable selling and administrative	1.5	4200
Total incremental costs	8.3		23240
Incremental profits	6.7		18760

2) Relevant cost per unit $0.50

Working:

The relevant cost is $0.50 (i.e. the variable selling and administrative expenses). Because the units have already been produced, thus other variable costs are sunk

Answer 2

wrong calculation