Question

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 104,400 units per year is: direct materials $ 2.20 direct labor $ 4.00 variable manufacturing overhead $ .90 fixed manufacturing overhead $ 4.45 variable selling and administrative expenses $ 1.80 fixed selling and administrative expenses $ 3.00 the normal selling price is $19 per unit. the company's capacity is 133,200 units per year. an order has been received from a mail-order house for 2,400 units at a special price of $16.00 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.)

Answer 1

If the order is accepted, the annual profits will decrease by $1,000,956.

Step-by-step explanation:

To calculate the increase or decrease in annual profits, we need to compare the profits before and after accepting the order.
Before accepting the order:
Total revenue = Selling price per unit x Normal activity level = $19 x 104,400 = $1,983,600
Total cost = (Direct materials + Direct labor + Variable manufacturing overhead + Fixed manufacturing overhead + Variable selling and administrative expenses + Fixed selling and administrative expenses) x Normal activity level = ($2.20 + $4.00 + $0.90 + $4.45 + $1.80 + $3.00) x 104,400 = $1,039,356
Profit = Total revenue - Total cost = $1,983,600 - $1,039,356 = $944,244

After accepting the order:
Total revenue = Selling price per unit x Quantity in the order = $16.00 x 2,400 = $38,400
Total cost remains the same at $1,039,356
Profit = Total revenue - Total cost = $38,400 - $1,039,356 = -$1,000,956

The order will result in a decrease in annual profits of $1,000,956.

Answer 2

Check the attached file for the answer.