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Special Order Decision [LO13-4] Delta Company produces a single product
Special Order Decision [LO13-4]
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 | $ | 1.70 | |
| Direct labor | $ | 3.00 | |
| Variable manufacturing overhead | $ | 0.60 | |
| Fixed manufacturing overhead | $ | 4.05 | |
| Variable selling and administrative expenses | $ | 1.20 | |
| Fixed selling and administrative expenses | $ | 2.00 | |
The normal selling price is $22.00 per unit. The company’s capacity is 126,000 units per year. An order has been received from a mail-order house for 2,300 units at a special price of $19.00 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 the inferior units?
Expert Solution
Answer :
(1) Computation of financial advantage (disadvantage) of accepting the special order
| 2300 Unit | |
| Sales ( 2300*$19) (a) | $ 43700 |
| Relevant cost | |
| Direct Material | $ 3910 |
| Direct Labor | $ 6900 |
| Variable manufacturing overhead | $ 1380 |
| Variable selling and administrative expenses | $ 2760 |
| Total Relevant cost (b) | $ 14950 |
| financial advantage of accepting the special order (a) - (b) | $ 28750 |
(2)
| Relevant cost per unit | $ 1.20 |
Explanation
The relevant cost is Variable selling and administrative expenses .....ie $ 1.20 per unit and all other variable cost is sunk cost since it is alredy incurred and Fixed cost is also not relevant since it is unavoidable.
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