Delta Company produces a single product. The cost of producingand selling a single unit of this product at the company’s normalactivity level of 94,800 units per year is:
Direct materials $ 2.00
Direct labor $ 3.00
Variable manufacturing overhead $ 0.70
Fixed manufacturing overhead $ 3.75
Variable selling and administrative expenses $ 2.00
Fixed selling and administrative expenses $ 2.00
The normal selling price is $25.00 per unit. The company’scapacity is 130,800 units per year. An order has been received froma mail-order house for 3,000 units at a special price of $22.00 perunit. This order would not affect regular sales or the company’stotal fixed costs.
1. What is the financial advantage (disadvantage) of acceptingthe special order?
2. As a separate matter from the special order, assume thecompany’s inventory includes 1,000 units of this product that wereproduced last year and that are inferior to the current model. Theunits must be sold through regular channels at reduced prices. Thecompany does not expect the selling of these inferior units to haveany effect on the sales of its current model. What unit cost isrelevant for establishing a minimum selling price for theseunits?
