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 93,600 units per year is:Direct materials $1.70Direct labor $3.00Variable manufacturing overhead $0.60Fixed manufacturing overhead $3.25Variable selling and administrative expenses $1.50Fixed selling and administrative expenses $2.00The normal selling price is $22.00 per unit. The company’s capacity is 124,800 units per year. An order has been received from a mail-order house for 2,600 units at a special price of $19.00 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. What unit cost is relevant for establishing a minimum selling price for these units?

Answer 1

Answer:

1.- financial advantage for $31,720

2.- the minimum price can be 6.80 dollars

Explanation:

For the special order we should only consider the variable cost as will not alter the fixed cost structure for the firm:

sales price    $  19.00

variable cost

Direct Materials         1.70

Direct Labor              3.00

Variable overhead    0.60

Variable S&A              1.50  

Total variable:            6.80

contribution per unit: $12.2

total contribution for 2,600 units: $31,720

2.- the inferior units can be sold for the variable cost to avoid a negative contribution.