Delta Company produces a single product. The cost of producing and selling a single unit of...

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Accounting

Delta Company produces a single product. The cost of producingand selling a single unit of this product at the company’s normalactivity level of 96,000 units per year is:
Direct materials $ 1.70
Direct labor $ 4.00
Variable manufacturing overhead $ 0.90
Fixed manufacturing overhead $ 4.05
Variable selling and administrative expenses $ 2.10
Fixed selling and administrative expenses $ 3.00
The normal selling price is $19.00 per unit. The company’scapacity is 121,200 units per year. An order has been received froma mail-order house for 2,100 units at a special price of $16.00 perunit. This order would not affect regular sales or the company’stotal fixed costs.
Required:
1. What is the financial advantage (disadvantage) of acceptingthe special order?
2. As a separate matter from the special order, assume thecompany’s inventory includes 1,000 units of this product that wereproduced last year and that are inferior to the current model. Theunits must be sold through regular channels at reduced prices. Thecompany does not expect the selling of these inferior units to haveany effect on the sales of its current model. What unit cost isrelevant for establishing a minimum selling price for theseunits?

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3.8 Ratings (384 Votes)

Requirement 1

Financial Advantage

$ 15,330.00

Working

financial advantage (disadvantage) of accepting the special order
Additional Revenue from offer (2100 x $16)	$ 33,600.00
Less: Total Additional cost due to acceptance of offer	$ 18,270.00
Financial Advantage	$ 15,330.00

Calculation of Additional Cost of Order
	Per Unit	Total
Direct material	$ 1.70	$ 3,570.00
Direct labor	$ 4.00	$ 8,400.00
Variable manufacturing overheads	$ 0.90	$ 1,890.00
Variable selling and administrative expenses	$ 2.10	$ 4,410.00
Additional fixed cost
Total Additional cost due to acceptance of order	$ 8.70	$ 18,270.00

Requirement 2

Relevant cost per unit =

$ 2.10

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.

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Direct materials	$	1.70
Direct labor	$	4.00
Variable manufacturing overhead	$	0.90
Fixed manufacturing overhead	$	4.05
Variable selling and administrative expenses	$	2.10
Fixed selling and administrative expenses	$	3.00