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 98,400 units per year is:

Direct materials	$	1.90
Direct labor	$	3.00
Variable manufacturing overhead	$	0.60
Fixed manufacturing overhead	$	5.05
Variable selling and administrative expenses	$	1.40
Fixed selling and administrative expenses	$	2.00

The normal selling price is $23.00 per unit. The company’s capacity is 115,200 units per year. An order has been received from a mail-order house for 1,400 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. What unit cost is relevant for establishing a minimum selling price for these units?

Answer 1

1)

	Per Unit	1,400 Units
Incremental Sales	20.00	28,000.00
Incremental Costs:
Direct Materials	1.90	2,660.00
Direct Labor	3.00	4,200.00
Variable manufacturing Overhead	0.60	840.00
Variable Selling and Administrative	1.40	1,960.00
Total Incremental Costs	6.90	9,660.00
Financial advantage of accepting the special order	13.10	18,340.00

2) The Relevant cost is 1.40 which is related to Variable selling and Administrative Expenses. All other Variable cost are already incurred with the production, this variable cost will be incurred if sold. The Fixed Cost are Irrelevant