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	$	1.60
Direct labor	$	2.00
Variable manufacturing overhead	$	0.70
Fixed manufacturing overhead	$	4.55
Variable selling and administrative expenses	$	1.30
Fixed selling and administrative expenses	$	1.00

The normal selling price is $23.00 per unit. The company’s capacity is 128,400 units per year. An order has been received from a mail-order house for 2,800 units at a special price of $20.00 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

1)Statement showing relevant cost for accepting special order

	Amount$
Direct materials	1.60
Direct labor	2.00
Variable manufacturing overhead	0.70
Variable selling and administrative expenses	1.30
Total cost	5.6$
Selling price	20$
Contribution per unit	14.4$
Financial Advantage 2,800units*14.4$	40,320$

Note:

This order will not change companys fixed cost Hence it is irrelevant for decision making

2)last year manufacture goods becomes inferior for current year so it should be sold at relevant cost incurred at current year and the manufacturing cost incurred last year is irrelevant becomes sunk cost so variable selling administrative expenses incurred at the time of sale not at the time of production

So Minimum selling price=1.3$ per unit