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 103,200 units per year is:

Direct materials	$	1.70
Direct labor	$	4.00
Variable manufacturing overhead	$	0.80
Fixed manufacturing overhead	$	3.45
Variable selling and administrative expenses	$	1.70
Fixed selling and administrative expenses	$	3.00

The normal selling price is $20.00 per unit. The company’s capacity is 115,200 units per year. An order has been received from a mail-order house for 1,000 units at a special price of $17.00 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
	Per unit	Total 1000 units
Incremental revenue	17.00	17000
Incremental costs:
Direct materials	1.70	1700
Direct labor	4.00	4000
Variable manufacturing overhead	0.80	800
Variable selling and administrative costs	1.70	1700
Total Incremental costs		8200
Incremental net operating income(loss)		8800
Financial advantage $8800
2
Relevant cost per unit = Variable selling and administrative costs =$1.70