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 96,000 units per year is:

Direct materials	$	2.00
Direct labor	$	3.00
Variable manufacturing overhead	$	.60
Fixed manufacturing overhead	$	4.65
Variable selling and administrative expenses	$	1.10
Fixed selling and administrative expenses	$	2.00

The normal selling price is $24 per unit. The company’s capacity is 130,800 units per year. An order has been received from a mail-order house for 2,900 units at a special price of $21.00 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.)

Annual profits would

by

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.)

Relevant cost per unit

Answer 1

Solution 1:

Computation of income from special order - Delta Company
Particulars	Amount
Revenue from special order (2900 * $21)	$60,900.00
Costs:
Direct materials	$5,800.00
Direct labor	$8,700.00
Variable manufacturing overhead	$1,740.00
Variable selling and admin overhead	$3,190.00
Net increase (decrease) in company operating income	$41,470.00

Therefore if special order is accepted then annual profit woul increased by $41,470.

Solution 2:

The relevant cost is $1.10 (the variable selling and administrative costs). All other variable costs are sunk as the units have already been produced and cost already incurred. The fixed costs would not be relevant, as they will not be affected by the sale of leftover units