Question

Help please!

Check 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 87,600 units per year is: $ 2.20 $4.00 Direct materials Direct labor Variable manufacturing overhead Fixed manufacturing overhead Variable selling and administrative expenses Fixed selling and administrative expenses The normal selling price is $23.00 per unit. The company's capacity is 123,600 units per year. An order has been received from a mail order house for 3,000 units at a special price of $20.00 per unit. This order would not affect regular sales or the company's total fixed costs. Requi 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?

Answer 1

1.

Financial advantage

$ 34,800

Computation :

	Reject Special Order	Accept Special Order	Increase ( decrease ) in Operating Income
Incremental Sales Revenue	$ 0	$ 60,000	$ 60,000
Incremental costs
Direct Materials	0	(6,600)	(6,600)
Direct Labor	0	(12,000)	(12,000)
Variable MOH	0	(2,100)	(2,100)
Variable S & A	0	(4,500)	(4,500)
Totals	$ 0	$ 34,800	$ 34,800

The fixed costs are not relevant to the decision because they will be incurred regardless of whether the special order is accepted or not.

2.

Relevant cost per unit

$ 1.50

The only relevant cost now is $1.50 (the variable selling and administrative expenses), since all variable manufacturing costs have already been incurred, and nothing can be done to undo them. They are sunk costs, and are not relevant to the decision.The fixed costs are not relevant because the total fixed costs will remain unchanged regardless of the pricing decision.