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 86,400 units per year is: Direct materials $2.00 Direct labor $3.00 Variable manufacturing overhead $0.60 Fixed manufacturing overhead $4.75 Variable selling and administrative expenses $1.90 Fixed selling and administrative expenses $2.00 The normal selling price is $23.00 per unit. The company's capacity is 114,000 units per year. An order has been received from a mail- order house for 2,300 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

Solution 1 Total Plant Capacity Current production Spare capacity 114000 units 86400 units 27600 units Particulars Direct Material Direct Labour Variable Mfr Overhead Variable Selling Overheads Total Variable Costs Amount $ 2.00 $ 3.00 $ 0.60 $ 7.50 Offered Selling Price $ 20.00 Less: Total Variable costs $ 7.50 Contribution per unit (A) $ 12.50 Number of units (B) 2300 units Total Contribution (AXB) $ 28,750.00 Hence, Financial Advantage of accepting the offer amounts to $28750 Solution 2. As these products were produced last year, then the costs like Direct material, Direct Labour and Variable Mfr Overhead were already incurred Variable selling overheads of $1.90 per unit is to be incurred this year. Therefore, relevant cost per unit should be $1.90 per unit

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