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 88,800 units per year is:

Direct materials	$	1.80
Direct labor	$	4.00
Variable manufacturing overhead	$	0.60
Fixed manufacturing overhead	$	4.65
Variable selling and administrative expenses	$	1.40
Fixed selling and administrative expenses	$	3.00

The normal selling price is $23.00 per unit. The company’s capacity is 120,000 units per year. An order has been received from a mail-order house for 2,600 units at a special price of $20.00 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

Answer
1
	Per unit	Total 2600 units
Incremental revenue	20	$            52,000	20*2600
Incremental costs:
Direct materials	1.8	$              4,680	1.8*2600
Direct labor	4	$            10,400	4*2600
Variable manufacturing overhead	0.6	$              1,560	0.60*2600
Variable selling and administrative costs	1.4	$              3,640	1.4*2600
Total Incremental costs		$            20,280
Incremental net operating income(loss)		$            31,720
Financial advantage $31,720
2
Relevant cost per unit = Variable selling and administrative costs = $1.40