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 98,400 units per year is:

Direct materials	$	1.90
Direct labor	$	3.00
Variable manufacturing overhead	$	.90
Fixed manufacturing overhead	$	4.05
Variable selling and administrative expense	$	1.30
Fixed selling and administrative expense	$	2.00

The normal selling price is $21 per unit. The company’s capacity is 122,400 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.

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.)

Annual profits would

by

(increase or decrease)

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.)

Relevant cost per unit

Answer 1

1
	Sales Price of Special Order	18.00
	Less: Relevant Cost for Order:
	Direct Material	1.90
	Direct Labor	3.00
	VMOH	0.90
	Variable S&A	1.30
	Fixed MOH	0.00	Sunk Cost
	Fixed S&A	0.00	Sunk Cost
	Relevant Cost	7.10
	Net Benefit Per Unit	10.90
	Unit Size	2000
	Total Annual Profit will increase by	21800
2	Since these are inferior units and the costs are already incurred.
	The relevant cost for these units is Nil i.e. Zero