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 85,200 units per year is:

Direct materials	$	1.90
Direct labor	$	3.00
Variable manufacturing overhead	$	.60
Fixed manufacturing overhead	$	4.45
Variable selling and administrative expenses	$	1.70
Fixed selling and administrative expenses	$	2.00

The normal selling price is $19 per unit. The company’s capacity is 121,200 units per year. An order has been received from a mail-order house for 3,000 units at a special price of $16.00 per unit. This order would not affect regular sales.

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.)

Answer 1

Ans 1. Here we shall consider the marginal contribution from manufacture of addotional 3000 units of the product as the fixed cost does not change for these units.

Ans 1. Marginal contribution from additional 3000 units.	$
Sales revenue (3000 units @ $ 16 per unit)	48000
(-) Expenses
Direct materials (3000 units @ $ 1.9)	5700
Direct labour (3000 units @ $ 3)	9000
Variable Mfg Ovh (3000 units @ $ 0.6)	1800
Marginal contribution	31500
Note: Variable selling & distribution overhead is not charged as the order has been received through a mail house.

Ans 2. The costing for these inferior products to be sold at reduced prices should be done only at variable cost.

Ans 2. Inferior products	$
Direct material	1.9
Direct labour	3
Variable Mfg Ovh	0.6
Variable Selling & Admin Ovh	1.7
Total cost	7.2