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 97,200 units per year is: Direct materials $ 2.20 Direct labor $ 4.00 Variable manufacturing overhead $ 0.60 Fixed manufacturing overhead $ 3.35 Variable selling and administrative expenses $ 1.60 Fixed selling and administrative expenses $ 3.00 The normal selling price is $21.00 per unit. The company’s capacity is 116,400 units per year. An order has been received from a mail-order house for 1,600 units at a special price of $18.00 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

Answer:

$15,360

Explanation:

As per the data given in the question,

Particulars                      Per unit                    1600 Units

Incremental sales           $18.00                   $28,800(1,600×$18)

Incremental cost :

Direct material                $2.20                    $3,520(1,600×$2.20)

Direct labor                    $4.00                      $6,400(1,600×$4)

Variable manufacturing overhead $0.60       $960(1,600×$0.60)

Variable selling and administrative expense $1.60 $2,560(1,600×$1.60)

Total incremental costs $8.40                         $13,440(1,600×$8.40)

Incremental profits $9.60($18.00-$8.40)          $15,360(1,600×$9.60)

The annual profit will enhance by $15,360 if special order is accepted.

2)

The relevant cost is $1.60 which is the price of Variable selling and administrative expense. Since units have already prepared So all other costs are sunk cost.The fixed cost is not relevant because they won't change in total value.