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 105,600 units per year is:

Direct materials	$	2.20
Direct labor	$	3.00
Variable manufacturing overhead	$	.70
Fixed manufacturing overhead	$	3.65
Variable selling and administrative expenses	$	1.20
Fixed selling and administrative expenses	$	2.00

The normal selling price is $22 per unit. The company’s capacity is 127,200 units per year. An order has been received from a mail-order house for 1,800 units at a special price of $19.00 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.)

    

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Answer 1

1)	Selling price per unit				19
	less:Variable cost
	Direct Materials			2.2
	Direct labor			3
	Variable manufacturing overhead			0.7
	variable selling & adm expense			1.2
	total variable expense				7.1
	Contribution margin				11.9
	contribution margin on special order				1800*11.9
					21420	answer
2)	$1.2 variable selling and administrative expense
	is relevant cost