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 86,400 units per year is:

Direct materials	$	1.60
Direct labor	$	2.00
Variable manufacturing overhead	$	0.60
Fixed manufacturing overhead	$	3.85
Variable selling and administrative expenses	$	1.80
Fixed selling and administrative expenses	$	1.00

The normal selling price is $20.00 per unit. The company’s capacity is 118,800 units per year. An order has been received from a mail-order house for 2,700 units at a special price of $17.00 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 these units?

Answer 1

1)	Selling price per unit (special order)				17
	less:Variable cost
	Direct Materials			1.6
	Direct labor			2
	Variable manufacturing overhead			0.6
	variable selling & adm expense			1.8
	total variable expense				6
	Contribution margin				11
	contribution margin on special order				2700*11
					29700	answer
	annual profit would increase by $29700
	Financial advantage		$29,700
2)	$1.80 variable selling and administrative expense
	is relevant cost
	Relevant cost per unit			$1.80