5.60 points Delta Company produces a single product. The cost of producing and s

ID: 2575773 • Letter: 5

Question

5.60 points 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 90,000 units per year is: Direct materials Direct labor Variable manufacturing overhead Fixed manufacturing overhead Variable selling and administrative expenses $ 1.20 $2.20 $ 4.00 $ .60 $4.85 Fixed selling and adiministrative expenses 5 3,00 The normal selling price is $23 per unit. The company's capacity is 126,000 units per year. An order has been received from a mail-order house for 3,000 units at a special price of $20.00 per unit. This order would not affect regular sales Required: 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.) Annual profits would

Explanation / Answer

Particulars

Per Unit

For 3000 units

Offer Price

60000

Less:

Direct Materials

2.2

6600

Direct Labor

12000

Variable Manufacturing Overheads

0.6

1800

Variable selling and administration expenses

1.2

3600

Total Incremental Costs

24000

Total Incremental Profit

36000

Fixed Manufacturing overheads and Fixed selling and administration expenses are not relevant for decision making. Hence, same have been ignored.

Annual Profit would increase by $ 36,000

Unit cost is relevant for establishing a minimum selling price for these units is $ 1.20 (i.e., Variable selling and administration Expenses.

Variable costs like Direct Material , Direct Labor, manufacturing overheads of already produced product will become sunk cost. And when coming to Variable selling and administration expenses, we are yet to incur the same at the time of sale and therefore, always should be considered for establishing a minimum selling price. Fixed manufacturing overheads and Fixed selling and administration expenses are always irrelevant and should not be considered for decision making