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 94,800 units per year is:

Direct materials	$	1.90
Direct labor	$	2.00
Variable manufacturing overhead	$	0.60
Fixed manufacturing overhead	$	4.55
Variable selling and administrative expenses	$	1.90
Fixed selling and administrative expenses	$	1.00

The normal selling price is $26.00 per unit. The company’s capacity is 124,800 units per year. An order has been received from a mail-order house for 2,500 units at a special price of $23.00 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. What unit cost is relevant for establishing a minimum selling price for these units?

Answer 1

	Selling Price	26.00
	Direct Material	1.90
	Direct Labor	2.00
	Variable MOH	0.60
	Fixed MOH	4.55
	Variable S&A	1.90
	Fixed S&A	1.00
	Total	11.95
1	Calculation of Relevant Cost for Special Order:
	Direct Material	1.90
	Direct Labor	2.00
	Variable MOH	0.60
	Fixed MOH	0.00	(Sunk Cost)
	Variable S&A	1.90
	Fixed S&A	0.00	(Sunk Cost)
	Total	6.40
	Special Price	23.00
	Net Benefit PU	16.60
	Special Units	2,500
	Financial Advantage	41,500
2	Minimum Selling Price will be equal to the cost to be incurred. Cost which has been already been incurred are irrelevant cost
	Variable S&A	1.90
	Minimum SP	1.90
	Total Inferior Units	1,000
	Total Sales Value	1,900.00