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 100,800 units per year is:

Direct materials	$	1.60
Direct labor	$	4.00
Variable manufacturing overhead	$	.70
Fixed manufacturing overhead	$	4.75
Variable selling and administrative expenses	$	2.10
Fixed selling and administrative expenses	$	3.00

The normal selling price is $22 per unit. The company�s capacity is 114,000 units per year. An order has been received from a mail-order house for 1,100 units at a special price of $19.00 per unit. This order would not affect regular sales.

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 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.)

Relevant cost per unit

Answer 1

Concepts and reason

Variable cost: The cost and expenses which change with the level of activity. The expenses which change with every extra unit produced. More the company produce, more will be the variable cost.

Fixed cost: These are the cost and expenses which does not change with the change in the level of activity. The expenses whose amount and nature of the occurrence, both are fixed. If the company does not produce any output, still the fixed expenses need to be paid.

Make or buy decision: It is the process of analyzing and deciding whether to make a product-in-house or to buy the same product from other vendor based on cost and benefits estimation.

Fundamentals

Direct material: these are the materials used during the manufacturing a product, direct materials are directly identifiable with the resultant product. These are easily traceable. The costs of direct materials are reported in the financial statements such as income statement. Direct materials include raw materials, sub-parts to assemble the product and specialized parts.

Direct Labor: it includes the labor involved in the production rather than support, maintenance and administration of the product. Direct labor refers to the workers and employees or any temporary help who work directly on manufacturing the product, goods or services. Direct labor cost is wages that are incurred in the production process and is part of the wage payroll and is shown in the income statement.

Manufacturing overhead: it refers to the all manufacturing costs which the factory incurs to manufacture the products, it does not include the variable costs such as direct labor and direct material. Manufacturing overhead is classified as an indirect cost.

Overheads: Overheads expenses are the costs required to produce the products and services. Overheads have been incurred in production process and in provide services. So, calculation of overheads is required to achieve precise cost of product and service. Overheads allocation is a subject that provides knowledge to take effective and efficient decision for cost assignation, control, ascertainment of profitability and reporting.

1.

Compute the increase or decrease in the annual profit for additional 1,100 units.

Calculations for the above computations are shown as follows:

2.

Relevant cost: It is a term which is used to determine the avoidable cost when making important decision making process. It is used to eliminate the cost which is unnecessary when taking decision making as to keep or sell a business unit or product. Under make or buy decision, profit can be determined by identifying the difference between the relevant cost to make and relevant cost to buy, if the management decides to buy the product externally.

The relevant cost is $2.10 pertaining to the variable selling and administrative expenses.

Ans: Part 1

Incremental Profit is $11,660.

Part 2

Relevant cost is $2.10