Question

Exercise 12-9 Special Order [LO12-4]

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 102,000 units per year is:

Direct materials	$	1.60
Direct labor	$	3.00
Variable manufacturing overhead	$	.70
Fixed manufacturing overhead	$	4.35
Variable selling and administrative expenses	$	1.30
Fixed selling and administrative expenses	$	2.00

The normal selling price is $21 per unit. The company’s capacity is 117,600 units per year. An order has been received from a mail-order house for 1,300 units at a special price of $18.00 per unit. This order would not affect regular sales.

Required:

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.)

   

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.)

    

Answer 1

1
	Per unit	Total 1300 units
Incremental revenue	18.00	23400
Incremental costs:
Direct materials	1.60	2080
Direct labor	3.00	3900
Variable manufacturing overhead	0.70	910
Variable selling and administrative costs	1.30	1690
Total Incremental costs		8580
Incremental net operating income(loss)		14820
Annual Profits would increase by 14820
2
Relevant cost per unit = Variable selling and administrative costs = 1.30