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	$	2.10
Direct labor	$	2.00
Variable manufacturing overhead	$	.60
Fixed manufacturing overhead	$	4.15
Variable selling and administrative expense	$	1.50
Fixed selling and administrative expense	$	1.00

The normal selling price is $18 per unit. The company’s capacity is 109,200 units per year. An order has been received from a mail-order house for 1,900 units at a special price of $15.00 per unit. This order would not affect regular sales.

Required:

1. 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.)

2. Assume the company has 500 units of this product left over from last year 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? (Round your answer to 2 decimal places.)

Answer 1

If order is accepted then
Direct materials	2.1
Direct labor	2
Variable manufacturing overhead	0.6
Variable selling and administrative expense	1.5
Total variable cost	6.2
Selling price per unit	15
Less: total variable cost per unit	6.2
Contribution per unit	8.8
Increase in Total contribution (8.8*1900)	16720
Less: increase in fixed cost , if any	0
Increase in annual profit by	16720
Assume the company has 500 units of this product left over from last year 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?
Unit relevant cost per unit is only Variable selling and administrative expense because all variable cost other than Variable selling and administrative expense already incurred.
Unit relevant cost	1.50