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 88,800 units per year is:

Direct materials	$	2.20
Direct labor	$	4.00
Variable manufacturing overhead	$	0.70
Fixed manufacturing overhead	$	3.85
Variable selling and administrative expenses	$	1.10
Fixed selling and administrative expenses	$	3.00

The normal selling price is $19.00 per unit. The company’s capacity is 109,200 units per year. An order has been received from a mail-order house for 1,700 units at a special price of $16.00 per unit. This order would not affect regular sales or the company’s total fixed costs.

Required:

1. What is the financial advantage (disadvantage) of accepting the special order?

2. As a separate matter from the special order, assume the company’s inventory includes 1,000 units of this product that were produced last year and that are inferior to the current model. The units must be sold through regular channels at reduced prices. The company does not expect the selling of these inferior units to have any effect on the sales of its current model. What unit cost is relevant for establishing a minimum selling price for the inferior units?

Answer 1

Req 1	Financial Advantage	18700
	sales	32300
	Less:
	Direct material	3740
	direct labor	6800
	variable manufacturing OH	1190
	Variable selling expense	1870
	Financial Advantage	18700
Req 2	Relevant cost per unit	1.1
	Reason: Relevant cost will be equal to variable selling and admin expense only, because units are already produced and any cost weather variable or fixed incurred on production of such units are sunk cost and hence irrelevant for decision making.