Exercise 12-9 Special Order [LO12-4] Delta Company produces a single product. Th
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Question
Exercise 12-9 Special Order [LO12-4]
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 91,200 units per year is:
The normal selling price is $24 per unit. The company’s capacity is 120,000 units per year. An order has been received from a mail-order house for 2,400 units at a special price of $21.00 per unit. This order would not affect regular sales.
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.)
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.)
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 91,200 units per year is:
Explanation / Answer
Answer 1 Annual profit will increase by 13.50*2400= $32400
Particulars
Normal Price per unit
2400 units (per unit)
Selling price (A)
24.00
21
Direct materials
1.80
1.80
Direct labor
3.00
3.00
Variable manufacturing overhead
0.90
0.90
Variable selling and administrative expenses
1.80
1.80
Total variable cost per unit (B)
7.50
7.50
Fixed manufacturing overhead
4.55
0
Fixed selling and administrative expenses
2.00
0
Fixed cost per unit (C )
6.55
0
Net Margin (A)-(B)-( C)
9.95
13.50
Answer 2
There are two types of cost involved in production one is variable and other is fixed. Variable cost has a direct relation with production on increase or decrease of production it will also increase and decrease. Whereas fixed cost is fixed upto a certain level of capacity. Upto that level even if production units increase or decrease there would be no impact on fixed cost.
hence on selling of any additional units from current sales if there is any margin after recovering variable cost then its benifitial.
In the present scanario 500 units are low in rank hence its difficult to sell them. By selling them if variable cost is recovered the company will be at breakeven point means no loss no profit. Hence variable cost of $7.50 is relevent for establishing minimum selling price.
In the other way fixed cost is allocated and recovered from the sale of the year. hence variable cost will only be relevent.
Particulars
Normal Price per unit
2400 units (per unit)
Selling price (A)
24.00
21
Direct materials
1.80
1.80
Direct labor
3.00
3.00
Variable manufacturing overhead
0.90
0.90
Variable selling and administrative expenses
1.80
1.80
Total variable cost per unit (B)
7.50
7.50
Fixed manufacturing overhead
4.55
0
Fixed selling and administrative expenses
2.00
0
Fixed cost per unit (C )
6.55
0
Net Margin (A)-(B)-( C)
9.95
13.50
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