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 94,800 units per year is:

Direct materials $ 2.00

Direct labor $ 3.00

Variable manufacturing overhead $ 0.70

Fixed manufacturing overhead $ 3.75

Variable selling and administrative expenses $ 2.00

Fixed selling and administrative expenses $ 2.00

The normal selling price is $25.00 per unit. The company’s capacity is 130,800 units per year. An order has been received from a mail-order house for 3,000 units at a special price of $22.00 per unit. This order would not affect regular sales or the company’s total fixed costs.

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: 1. The financial advantage (disadvantage) of accepting the order is calculated as follows:-

Per unit 3,000 (Units)

Accumulated Sales     = $22.00 $66,000 ($22.00*3,000)

To calculate accumulated costs:-

(a) Direct Materials     = $2.00 $6,000 ($2.00*3,000)

(b) Direct Labour    = $3.00   $9,000 ($3.00*3,000)

(c) Variable Manufacturing Overhead = $0.70 $2,100 ($0.70*3,000)

(d) Variable Selling & Administrative Expenses = $2.00 $6,000 ($2.00*3,000)

Total = $7.70 $23,100

  

Per Unit 3,000 Units

So, Accumulated Sales = $22.00 $66,000

Less:- Total Accumulated Costs =$7.70 $23,100

Financial Advantage of accepting the special order = $14.30 $42,900

So, The financial advantage (disadvantage) of accepting the special order is $42,900, because the fixed costs are not significant to the decision whether the special order is accepted or rejected they will be obtain unconcerned.

2.The unit cost is relevant for establishing a minimum selling price for these units is $2.00 per unit (Variable selling & administrative expenses) because the other variable costs are lower because the units have been already produced and all the fixed costs are not applicable because they all are not change in total.