Question

Exercise 12-9 Special Order Decision [LO12-4] Delta Company produces a single product. The cost of producing and selling a single unit of this product at the company's norma activity level of 93,600 units per year is: Direct materials Direct labor Variable manufacturing overhead Fixed manufacturing overhead Variable selling and administrative expenses Fixed selling and administrative expenses $ 2.50 $ 3.00 $ 0.90 1.30 $ 2.00 The normal selling price is $21.00 per unit. The company's capacity is 122,400 units per year. An order has been received from a mail order house for 2,400 units at a special price of $18.00 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. What unit cost is relevant for establishing a minimum selling price for these units?

Answer 1

	Per unit	Total 2400 units
Incremental revenue	18	43200
Incremental costs:
Direct materials	2.50	6000
Direct labor	3.00	7200
Variable manufacturing overhead	0.90	2160
Variable selling and administrative expenses	1.30	3120
Total Incremental costs		18480
Incremental net operating income(loss)		24720
Financial advantage $24720
2
Relevant cost per unit = Variable selling and administrative expenses = $1.30