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 105,600 units per year is:
| Direct materials | $ | 1.50 | |
| Direct labor | $ | 4.00 | |
| Variable manufacturing overhead | $ | 0.60 | |
| Fixed manufacturing overhead | $ | 3.25 | |
| Variable selling and administrative expenses | $ | 1.80 | |
| Fixed selling and administrative expenses | $ | 3.00 | |
The normal selling price is $25.00 per unit. The company’s capacity is 127,200 units per year. An order has been received from a mail-order house for 1,800 units at a special price of $22.00 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?
1.
Relevant cost for special order:
= ($1.50 + $4 + $0.60 + $1.80) X 1,800
= $14,220
Total sale value of special order:
= $22 X 1,800
= $39,600
The sale value of the special order is more than the relevant cost for a special order. There will be a financial advantage of the special order is accepted.
Financial advantage:
= $39,600 - $14,220
= $25,380
2.
The relevant cost to sell the inferior units is only the variable selling an administrative expense.
Minimun sale price = $1.80
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