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

$

2.10

  Direct labor

$

2.00

  Variable manufacturing overhead

$

.70

  Fixed manufacturing overhead

$

3.75

  Variable selling and administrative expenses

$

1.60

  Fixed selling and administrative expenses

$

1.00

The normal selling price is $24 per unit. The company’s capacity is 117,600 units per year. An order has been received from a mail-order house for 1,900 units at a special price of $21.00 per unit. This order would not affect regular sales.

Required:

PART1.

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 (INCREASE OR DECREASE

by_______

PART2.

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

Per Unit		1,900
		Units
Incremental sales	21	39,900
Incremental costs:
Direct materials	2.1	3,990
Direct labor	2	3,800
Variable manufacturing overhead	0.7	1,330
Variable selling and administrative	1.6	3,040
Total incremental costs	6.4	12,160
Financial advantage of accepting the special order	14.6	27,740
Annual profits would INCREASE	27,740
2 1.6$
The relevant cost is $1.60 (the variable selling and administrative expenses). All other variable costs are sunk because the units have already been produced. The fixed costs are not relevant because they will not change in total as a consequence of the price charged for the left-over units.