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 65,000 units per year is:

Direct materials	$        7.50
Direct labor	$        4.60
Variable manufacturing overhead	$        2.50
Fixed manufacturing overhead	$        6.90
Variable selling and administrative expense	$        2.75
Fixed selling and administrative expense	$        4.30

The normal selling price is $40 per unit. The company’s capacity is 90,000 units per year. An order has been received from a mail-order house for 25,000 units at a special price of $24.00 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 800 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. What unit cost is relevant for establishing a minimum selling price for these units?

Answer 1

1. If special order is accepted then there will be incremental profit of $166,250. Hence, the offer is viable for the company.

2. In the given situation company need to recover its all variable costs associated to sale from these 800 units. Hence the minimum selling price shall be $17.35 per unit.