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 105,600 units per year is:

Direct materials	$	2.10
Direct labor	$	3.00
Variable manufacturing overhead	$	0.70
Fixed manufacturing overhead	$	4.95
Variable selling and administrative expenses	$	2.00
Fixed selling and administrative expenses	$	2.00

The normal selling price is $21.00 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 $18.00 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

1)

	Per unit	1800 units
Incremental sales	$18	$32400
Incremental cost:
Direct material	$2.1	$3780
Direct labour	$3.0	$5400
Variable manufacturing overhead	$0.7	$1260
Variable selling overhead	$2.0	$3600
Total incremental cost	$7.8	$14040
Financial advantage of accepting the order	$10.2	$18360

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B)

In this case variable selling and administrative cost of $2.00 will be relevent cost because as the product was produced last year all other variable cost have already been incurred and thus irrelevant and fixed cost will also not change as it also has been already incurred so it also becomes irrelvant.

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