Delta Company produces a single product. The cost of producing and selling a single unit of this product at the companyâs normal activity level of 88,800 units per year is:
Direct materials $ 1.90 Direct labor $ 4.00 Variable manufacturing overhead $ .60 Fixed manufacturing overhead $ 4.15 Variable selling and administrative expenses $ 1.70 Fixed selling and administrative expenses $ 3.00
The normal selling price is $26 per unit. The companyâs capacity is 124,800 units per year. An order has been received from a mail-order house for 3,000 units at a special price of $23.00 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 companyâs total fixed costs.)
Annual profits would by
2. Assume the company has 500 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? (Round your answer to 2 decimal places.)
Relevant cost per unit
For many years Futura Company has purchased the starters that it installs in its standard line of farm tractors. Due to a reduction in output, the company has idle capacity that could be used to produce the starters. The chief engineer has recommended against this move, however, pointing out that the per unit cost to produce the 70,000 starters needed would be greater than the current $11.80 per unit purchase price:
Per Unit Total Direct materials $ 5.00 Direct labor 3.50 Supervision 1.70 $ 119,000 Depreciation 1.50 $ 105,000 Variable manufacturing overhead 0.40 Rent 0.30 $ 21,000 Total product cost $ 12.40
A supervisor would have to be hired to oversee production of the starters. However, the company has sufficient idle tools and machinery so that no new equipment would have to be purchased. The rent charge above is based on space utilized in the plant. The total rent on the plant is $83,000 per period. Depreciation is due to obsolescence rather than wear and tear.
Required:
1. Determine the total relevant cost per unit if starters are made inside the company. (Round your answer to 2 decimal places.)
Relevant cost per unit
2. Determine the total relevant cost per unit if starters are purchased from an outside supplier. (Round your answer to 2 decimal places.)
Relevant cost per unit
3. What is the increase or decrease in profits as a result of purchasing the starters from an outside supplier rather than making them inside the company? (Do not round intermediate calculations. Round your answer to the nearest dollar amount.)
Profit would by per period
rev: 08_12_2014_QC_52194, 11_03_2014_QC_58434, 11_15_2016_QC_CS-69994
| Delta Company produces a single product. The cost of producing and selling a single unit of this product at the companyâs normal activity level of 88,800 units per year is: |
| Direct materials | $ | 1.90 | |
| Direct labor | $ | 4.00 | |
| Variable manufacturing overhead | $ | .60 | |
| Fixed manufacturing overhead | $ | 4.15 | |
| Variable selling and administrative expenses | $ | 1.70 | |
| Fixed selling and administrative expenses | $ | 3.00 | |
| The normal selling price is $26 per unit. The companyâs capacity is 124,800 units per year. An order has been received from a mail-order house for 3,000 units at a special price of $23.00 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 companyâs total fixed costs.) |
|
| 2. | Assume the company has 500 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? (Round your answer to 2 decimal places.) |
|
| For many years Futura Company has purchased the starters that it installs in its standard line of farm tractors. Due to a reduction in output, the company has idle capacity that could be used to produce the starters. The chief engineer has recommended against this move, however, pointing out that the per unit cost to produce the 70,000 starters needed would be greater than the current $11.80 per unit purchase price: |
| Per Unit | Total | |||
| Direct materials | $ | 5.00 | ||
| Direct labor | 3.50 | |||
| Supervision | 1.70 | $ | 119,000 | |
| Depreciation | 1.50 | $ | 105,000 | |
| Variable manufacturing overhead | 0.40 | |||
| Rent | 0.30 | $ | 21,000 | |
| Total product cost | $ | 12.40 | ||
| A supervisor would have to be hired to oversee production of the starters. However, the company has sufficient idle tools and machinery so that no new equipment would have to be purchased. The rent charge above is based on space utilized in the plant. The total rent on the plant is $83,000 per period. Depreciation is due to obsolescence rather than wear and tear. |
| Required: |
| 1. | Determine the total relevant cost per unit if starters are made inside the company. (Round your answer to 2 decimal places.) |
|
| 2. | Determine the total relevant cost per unit if starters are purchased from an outside supplier. (Round your answer to 2 decimal places.) |
|
| 3. | What is the increase or decrease in profits as a result of purchasing the starters from an outside supplier rather than making them inside the company? (Do not round intermediate calculations. Round your answer to the nearest dollar amount.) |
|
rev: 08_12_2014_QC_52194, 11_03_2014_QC_58434, 11_15_2016_QC_CS-69994
Related questions
| Delta Company produces a single product. The cost of producing and selling a single unit of this product at the companyâs normal activity level of 97,200 units per year is: |
| Direct materials | $ | 2.40 | |
| Direct labor | $ | 2.00 | |
| Variable manufacturing overhead | $ | .90 | |
| Fixed manufacturing overhead | $ | 4.55 | |
| Variable selling and administrative expenses | $ | 1.80 | |
| Fixed selling and administrative expenses | $ | 1.00 | |
| The normal selling price is $25 per unit. The companyâs capacity is 109,200 units per year. An order has been received from a mail-order house for 1,000 units at a special price of $22.00 per unit. This order would not affect regular sales.
|
Delta Company produces a single product. The cost of producing and selling a single unit of this product at the companyâs normal activity level of 91,200 units per year is:
| Direct materials | $ | 1.90 | |
| Direct labor | $ | 2.00 | |
| Variable manufacturing overhead | $ | 0.70 | |
| Fixed manufacturing overhead | $ | 5.05 | |
| Variable selling and administrative expenses | $ | 2.10 | |
| Fixed selling and administrative expenses | $ | 1.00 | |
The normal selling price is $25.00 per unit. The companyâs capacity is 117,600 units per year. An order has been received from a mail-order house for 2,200 units at a special price of $22.00 per unit. This order would not affect regular sales or the companyâs 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 companyâs 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?
