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 88,800 units per year is: Direct materials $ 1.50 Direct labor $ 3.00 Variable manufacturing overhead $ 0.50 Fixed manufacturing overhead $ 4.45 Variable selling and administrative expenses $ 1.30 Fixed selling and administrative expenses $ 2.00 The normal selling price is $21.00 per unit. The company's capacity is 112,800 units per year. An order has been received from a mail-order house for 2,000 units at a special price of $18.00 per unit. This order would not affect regular sales or the company's total fixed costs

Answer 1

The company should accept the special offer because it increases income by $23,400.

Explanation:

Giving the following information:

Variable costs:

Direct materials $1.50

Direct labor $3.00

Variable manufacturing overhead $0.50

Variable selling and administrative expenses $1.30

Total variable cost= $6.3

An order has been received from a mail-order house for 2,000 units at a special price of $18.00 per unit.

Because it is a special offer and there is unused capacity, we will not take into account the fixed costs:

Effect on income= number of units*unitary contribution margin

Effect on income= 2,000* (18 - 6.3)

Effect on income= $23,400 increase

The company should accept the special offer because it increases income by $23,400.