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 98,400 units per year is:

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 98,400 units per year is:

Direct materials	$	1.50
Direct labor	$	2.00
Variable manufacturing overhead	$	0.90
Fixed manufacturing overhead	$	4.05
Variable selling and administrative expenses	$	1.40
Fixed selling and administrative expenses	$	1.00

The normal selling price is $18.00 per unit. The company’s capacity is 112,800 units per year. An order has been received from a mail-order house for 1,200 units at a special price of $15.00 per unit. This order would not affect regular sales or the company’s 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 company’s 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. The company does not expect the selling of these inferior units to have any effect on the sales of its current model. What unit cost is relevant for establishing a minimum selling price for these units?

Explanation

1.

The financial advantage is computed as follows:

	Per Unit			1,200 Units
Incremental sales	$	15.00		$	18,000
Incremental costs:
Direct materials		1.50			1,800
Direct labor		2.00			2,400
Variable manufacturing overhead		.90			1,080
Variable selling and administrative		1.40			1,680
Total incremental costs	$	5.80			6,960
Financial advantage of accepting the special order		9.20			11,040

The fixed costs are not relevant to the decision because they will be incurred regardless of whether the special order is accepted or rejected.

2.

The relevant cost is $1.40 (the variable selling and administrative expenses). All other variable costs are sunk because the units have already been produced. The fixed costs are not relevant because they will not change in total as a consequence of the price charged for the left-over units.

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Dorsey Company manufactures three products from a common input in a joint processing operation. Joint processing costs up to the split-off point total $350,000 per quarter. For financial reporting purposes, the company allocates these costs to the joint products on the basis of their relative sales value at the split-off point. Unit selling prices and total output at the split-off point are as follows:

Dorsey Company manufactures three products from a common input in a joint processing operation. Joint processing costs up to the split-off point total $350,000 per quarter. For financial reporting purposes, the company allocates these costs to the joint products on the basis of their relative sales value at the split-off point. Unit selling prices and total output at the split-off point are as follows:

Product	Selling Price			Quarterly Output
A	$	20.00	per pound		13,000	pounds
B	$	14.00	per pound		20,300	pounds
C	$	26.00	per gallon		4,200	gallons

Each product can be processed further after the split-off point. Additional processing requires no special facilities. The additional processing costs (per quarter) and unit selling prices after further processing are given below:

Product	Additional Processing Costs		Selling Price
A	$	70,950	$	25.10	per pound
B	$	101,905	$	20.10	per pound
C	$	43,780	$	34.10	per gallon

Required:

1. What is the financial advantage (disadvantage) of further processing each of the three products beyond the split-off point?

2. Based on your analysis in requirement 1, which product or products should be sold at the split-off point and which product or products should be processed further?

 

Explanation

 

2.

Products A and C should be sold at the split-off point. Only product B should be processed further.

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Imperial Jewelers manufactures and sells a gold bracelet for $406.00. The company’s accounting system says that the unit product cost for this bracelet is $264.00 as shown below:

Imperial Jewelers manufactures and sells a gold bracelet for $406.00. The company’s accounting system says that the unit product cost for this bracelet is $264.00 as shown below:

Direct materials	$	147
Direct labor		83
Manufacturing overhead		34
Unit product cost	$	264

The members of a wedding party have approached Imperial Jewelers about buying 30 of these gold bracelets for the discounted price of $366.00 each. The members of the wedding party would like special filigree applied to the bracelets that would require Imperial Jewelers to buy a special tool for $459 and that would increase the direct materials cost per bracelet by $13. The special tool would have no other use once the special order is completed.

To analyze this special order opportunity, Imperial Jewelers has determined that most of its manufacturing overhead is fixed and unaffected by variations in how much jewelry is produced in any given period. However, $14.00 of the overhead is variable with respect to the number of bracelets produced. The company also believes that accepting this order would have no effect on its ability to produce and sell jewelry to other customers. Furthermore, the company could fulfill the wedding party’s order using its existing manufacturing capacity.

Required:

1. What is the financial advantage (disadvantage) of accepting the special order from the wedding party?

2. Should the company accept the special order?

Explanation

1.

Only the incremental costs and benefits are relevant. In particular, only the variable manufacturing overhead and the cost of the special tool are relevant overhead costs in this situation. The other manufacturing overhead costs are fixed and are not affected by the decision.

	Per Unit			Total for 30 Bracelets
Incremental revenue	$	366.00		$	10,980.00
Incremental costs:
Variable costs:
Direct materials	$	147.00			4,410.00
Direct labor		83.00			2,490.00
Variable manufacturing overhead		14.00			420.00
Special filigree		13.00			390.00
Total variable cost	$	257.00			7,710.00
Fixed costs:
Purchase of special tool					459.00
Total incremental cost					8,169.00
Financial advantage of accepting the special order				$	2,811.00

2.

Even though the price for the special order is below the company's regular price for such an item, the company would be better off accepting the order. This conclusion would not necessarily follow if the special order affected the regular selling price of bracelets or if it required the use of a constrained resource.

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