Question

Delta Corp. produces a single product. The cost of producing and selling a single unit of this product at the company's normal activity level of 59,850 units per month is as follows:

Direct material	$71.80
Direct labor	$16.65
Variable manufacturing overhead	$4.65
Fixed manufacturing overhead	$22.60
Variable selling and administrative expense	$6.65
Fixed selling and administrative expense	$17.30
Total	$139.65

The normal selling price of the product is $167.60 per unit.

An order has been received from an overseas customer for 9,300 units to be delivered this month at a special discounted price. This order would have no effect on the company's normal sales and would not change the total amount of the company's fixed costs. The variable selling and administrative expense would be $4.00 less per unit on this order than on normal sales.
Direct labor is a variable cost in this company.

Questions

1. Suppose there is ample idle capacity to produce the units required by the overseas customer and the special discounted price on the special order is $131.70 per unit. By how much would this special order increase (decrease) the company's net operating income for the month?

My answer = $334,335

2. Suppose the company is already operating at capacity when the special order is received from the overseas customer. What would be the opportunity cost of each unit delivered to the overseas customer?

My answer = $67.85

3. Suppose there is not enough idle capacity to produce all of the units for the overseas customer and accepting the special order would require cutting back on production of 9,300 units for regular customers. What would be the minimum acceptable price per unit for the special order?

My answer = $163.60

4. What are the advantage(s) to Delta Corp. of foregoing manufacture of the product for sales by Delta and instead manufacturing for sales by other companies?

5. What are the dangers of the strategy mentioned in Question 3?

Answer 1

1	Suppose there is ample idle capacity to produce the units required by the overseas customer and the special discounted price on the special order is $131.70 per unit. By how much would this special order increase (decrease) the company's net operating income for the month?
	Variable cost on normal sale units
	Direct Materials					$71.80
	Direct Labor					$16.65
	Variable Manufacturing overhead					$4.65
	Variable selling & Administrative expense					$6.65
	Total Variable cost per unit					$99.75
	Variable cost on special unit
	Variable cost on normal unit sale					$99.75
	Less : reduction in selling and administrative ex[emse					$4
	Variable cost per unit on special order					$95.75
	Selling price for special order					$131.70
	Less : Variable cost per unit on special order					$95.75
	Contribution margin per unit					$35.95
	Number of Units of special order					9300
	Increase (decrease) in net operating income					$334,335.00
2	Suppose the company is already operating at capacity when the special order is received from the overseas customer. What would be the opportunity cost of each unit delivered to the overseas customer?
	The opportunity cost would be the contribution margin on normal sales
	Normal Selling Price					$167.60
	Variable cost per unit on normal sales					$99.75
	Contribution margin per unit					$67.85
3	Suppose there is not enough idle capacity to produce all of the units for the overseas customer and accepting the special order would require cutting back on production of 9,300 units for regular customers. What would be the minimum acceptable price per unit for the special order?
	Contribution margin per unit					$67.85
	Displaced normal sales					9300
	Lost contribution on sales					$631,005.00
	Total variable cost on special order (95.75*9300)					890475
	Number of units in special order					9300
	Minimum Acceptable price					95.75
4	The advantage would be that the company will not have to incur the various variable costs associated with producing the goods as the same would be manufactured by other companies. The fixed costs would continue
5	The dangers would be that of subsequently the costs associated with production increases that is variable and fixed costs, there is possiblity the company would face loss
	Also, these customers are regular customers of the company, if goods are not delivered to them than there is poosibilty of these customers going to other company and there would be loss of these customers subsequently