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 96,000 units per year is: Direct materials $ 1.80 Direct labor $ 3.00 Variable manufacturing overhead $ 0.90 Fixed manufacturing overhead $ 5.15 Variable selling and administrative expenses $ 1.50 Fixed selling and administrative expenses $ 2.00 The normal selling price is $21.00 per unit. The company’s capacity is 120,000 units per year. An order has been received from a mail-order house for 2,000 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? What is the financial advantage (disadvantage) of accepting the special order?

1a.) 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	Total 2000 units
Incremental revenue	18.00	36000
Incremental costs:
Direct materials	1.80	3600
Direct labor	3.00	6000
Variable manufacturing overhead	0.90	1800
Variable selling and administrative costs	1.50	3000
Total Incremental costs		14400
Incremental net operating income(loss)		21600
Financial advantage 21600
2
Relevant cost per unit = Variable selling and administrative costs = 1.50