Prepare computations showing how much profits will increase or decrease as a res
ID: 2463298 • Letter: P
Question
Prepare computations showing how much profits will increase or decrease as a result of making the starters. 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 60.000 units per year is: The normal selling price is $21 per unit. The company's capacity is 75.000 units per year. An order has been received from a mail-order house for 15,000 units at a special price of $14.00 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.) 2.Assume the company has 1.000 units of this product left over from last year 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? Explain.Explanation / Answer
1)
Annual Profit be increased = (Sale Price per unit of new order - Direct Material - Direct Labor -Variable manufacturing overhead - Variable Selling & Administration)*No of Unit new order
Annual Profit be increased =(14-5.10-3.80-1-1.5)*15000
Annual Profit be increased = $ 39,000
2)
Unit cost is relevant for establishing a minimum selling price for these unit = Variable Selling and administrative expenses
Unit cost is relevant for establishing a minimum selling price for these unit = $ 1.50
As other cost are already incurred , they are sunk cost and therefore irrelevant for inferrior unit.