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	$	2.10
Direct labor	$	4.00
Variable manufacturing overhead	$	.70
Fixed manufacturing overhead	$	4.65
Variable selling and administrative expenses	$	1.70
Fixed selling and administrative expenses	$	3.00

The normal selling price is $25 per unit. The company’s capacity is 122,400 units per year. An order has been received from a mail-order house for 2,200 units at a special price of $22.00 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
	Special price	22
	Variable cost
	Direct material	2.1
	Direct labor	4
	Variable manufacturing overheads	0.7
	Variable selling and admin expense	1.7
	Total variable expense	8.5
	Net operating income per unit	13.5
	Number of units	2200
	Annual profit increased by	29700
2	Direct material	2.1
	Direct labor	4
	Variable manufacturing overheads	0.7
	Variable selling and admin expense	1.7
	Unit price for selling inferior goods	8.5