Question

Delta Screen Corporation is currently operating at 60% of capacity and producing 6,000 screens annually. The normal selling price is $750 per screen. They recently received an offer from a company in Germany to purchase 2,000 screens for $500 per unit. Delta has not previously sold products in Germany. Budgeted production costs for 6,000 and 8,000 screens follow:

              Units Produced                                                       6,000                            8,000     

              Direct Materials Cost                                      $   750,000                $ 1,000,000

              Direct Labor Cost                                                750,000                        1,000,000

              Variable Overhead                                               900,000                          1,200,000     

Fixed Overhead                                                        1,200,000                    1,200,000

              Total Cost                                                              3,600,000                4,400,000

              Full Cost per Unit                                                       600                            550

Delta’s marketing manager believes that although the price offered by the German customer is lower than current price, the order should be accepted to gain a foothold in the German market. The production manager, however, believes that the order should be rejected because the unit cost is higher than the price offered.

If the president of Delta were to call on you to resolve the difference in opinion, what would you recommend? Explain.

What is the minimum price for the special order if Delta is operating at full capacity?

Answer 1