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 97,200 units per year is:

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.)

Direct materials	$	1.50
Direct labor	$	3.00
Variable manufacturing overhead	$	1.00
Fixed manufacturing overhead	$	4.15
Variable selling and administrative expenses	$	1.60
Fixed selling and administrative expenses	$	2.00

The normal selling price is $23 per unit. The company’s capacity is 132,000 units per year. An order has been received from a mail-order house for 2,900 units at a special price of $20.00 per unit. This order would not affect regular sales.

Answer 1

1.

Cost of Producing per unit
Particulars	Cost
Direct Material	1.50
Direct Labour	3.00
Variable Manufacturing Overhead	1.00
Fixed Manufacturing Overhead	4.15
Variable selling and Administrative Overhead	1.60
Fixed selling and Administrative Overhead	2.00
Total Cost	13.25

Calculation of profit for order received for 2900 units
Cost of producing order received
Direct Material	1.50
Direct Labour	3.00
Variable Manufacturing Overhead	1.00
Variable selling and Administrative Overhead	1.60
Total Cost	7.10
Sales Price	20.00
Profit per unit	12.90
Total Profit	37,410.00

We will consider only variable cost as its given that new order would not affect regular sales and not change fixed cost of product.

Therefore , annual profit will be increased by $ 37,410 if order is accepted.

2. If 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.

Unit cost relevant for establishing a minimum selling price for these units will be $ 2 (i.e $ 1.6 rounded off) Variable selling and Administrative Overhead.