Delta Company produces a single product The cost of producin

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 99,600 units per year is: S 2.40 3.00 $ 80 $ 4.25 $ 1.20 s 2.00 Direct materials Direct labor Fixed manufacturing overhead Variable seling and administrative expense Fixed seling and administrative expense The normal selling price is $24 per unit. The company\'s capacity is 134,400 units per year. An order has been received from a mail-order house for 2,900 units at a special price of $21.00 per unit. This order would not affect regular sales. Rcquired: 1. If the order is accepted, by how much will annual profits be increased or decreased? (The order will not change the company\'s total fixed costs.) 2. Assume the company has 500 units of this product left over from last year 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? (Round your answer to 2 decimal places.) cost per

Solution

Answer 1 Calculation of change in annual profit if order is accepted Sales (2900 units * $21) $60,900 Less : Relevant Variable costs - Direct Material (2900 units * $2.40) $6,960 - Direct Labour (2900 units * $3) $8,700 - Variable Manufacturing Overheads (2900 units * $0.80) $2,320 - Variable selling and administrative overheads (2900 units * $1.20) $3,480 Increase in profit $39,440 Annual profit would increase by $39,440. Answer 2 Unit cost relevant for establishing a minimum selling price of 500 inferior units Direct Material $2.40 Direct Labour $3.00 Variable Manufacturing Overhead $0.80 Variable selling and administrative overhead $1.20 Relevant cost per unit $7.40