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 60,000 units per year is:
The normal selling price is 21 per unit. The company's capacity is 75,000 units per year. An order has been received from a mail-order house for 15,000 units at a special price of 14.00 per unit. This order would not affect regular sales.
(a) 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.)

Answer 1

Net financial advantage for accepting order = $39,000.00

Provided that there will be no disruption to the Company's activities, with this special order, no additional fixed cost shall be incurred.

Further variable costs per unit will be:

Direct material = $5.10

Direct Labor = $3.80

Variable Manufacturing Overhead = $1.00

Variable Selling & Administrative Expense = $1.50

Total variable expense = $11.4

Order of 15,000 units will be sold at $14 per unit.

Therefore, financial advantage = $14 - $11.40 = $2.60 per unit

Net financial advantage for accepting order = $2.60 * 15,000 = $39,000

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