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 103,200 units per year is:

Direct materials	$	1.70
Direct labor	$	3.00
Variable manufacturing overhead	$	0.90
Fixed manufacturing overhead	$	3.35
Variable selling and administrative expenses	$	1.90
Fixed selling and administrative expenses	$	2.00

The normal selling price is $19.00 per unit. The company’s capacity is 127,200 units per year. An order has been received from a mail-order house for 2,000 units at a special price of $16.00 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. 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

Requirement 1

Financial Advantage

$ 17,000

Requirement 2

Relevant cost per unit =

$ 1.90

Working

financial advantage (disadvantage) of accepting the special order
Additional Revenue from offer (2000 x $16)	$ 32,000
Less: Total Additional cost due to acceptance of offer	$ 15,000
Financial Advantage	$ 17,000

.

Calculation of Additional Cost of Order
	Per Unit	Total
Direct material	$                      1.70	$ 3,400
Direct labor	$                      3.00	$ 6,000
Variable manufacturing overheads	$                      0.90	$ 1,800
Variable selling and administrative expenses	$                      1.90	$ 3,800
Total Additional cost due to acceptance of order	$                      7.50	$ 15,000

.Only selling cost will be relevant cost because all the manufacturing cost is already done hence that manufacturing cost is sunk cost and irrelevant in the case of 1000 units.