Dalton Quilting Company makes blankets that it markets through a variety of department stores. It makes the blankets in batches of 1,000 units. Dalton made 20,000 blankets during the prior accounting period. The cost of producing the blankets is summarized here.

Dalton Quilting Company makes blankets that it markets through a variety of department stores. It makes the blankets in batches of 1,000 units. Dalton made 20,000 blankets during the prior accounting period. The cost of producing the blankets is summarized here.

Materials cost ($10 per unit × 20,000)	$	200,000
Labor cost ($9 per unit × 20,000)		180,000
Manufacturing supplies ($1.50 × 20,000)		30,000
Batch-level costs (20 batches at $2,000 per batch)		40,000
Product-level costs		80,000
Facility-level costs		145,000
Total costs	$	675,000
Cost per unit = $675,000 ÷ 20,000 = $33.75

Required

1. Sunny Motels has offered to buy a batch of 500 blankets for $23.50 each. Dalton's normal selling price is $45 per unit. Calculate the relevant cost per unit for the special order. Based on the preceding quantitative data, should Dalton accept the special order?
2. Sunny offered to buy a batch of 1,000 blankets for $23.50 per unit, calculate the relevant cost per unit for the special order. Should Dalton accept the special order?
    

   Explanation

   a.
   The product-level and facility-level costs are not avoidable because they will be incurred regardless of whether the special order is accepted. The relevant (avoidable) costs for 500 blankets are:
    

   Production Cost for 500 Blankets
   Materials ($10 per unit × 500)	$	5,000
   Labor ($9 per unit × 500)		4,500
   Manufacturing supplies ($1.50 × 500)		750
   Batch-level costs (1 batch at $2,000)		2,000
   Total costs	$	12,250
   Cost per unit = $12,250 ÷ 500 = $24.50

   
   Dalton should reject the special order because the revenue generated from sales to Sunny ($23.50 per unit) is below the avoidable cost of production.
   
   b.
   Since the batch-level costs are fixed relative to the number of units within the relevant range of 1 to 1,000 units, the avoidable cost per unit will decrease when the number of units increases from 500 to 1,000. The supporting computations are shown below:
    

   Production Cost for 1,000 Blankets
   Materials ($10 per unit × 1,000)	$	10,000
   Labor ($9 per unit × 1,000)		9,000
   Manufacturing supplies ($1.50 × 1,000)		1,500
   Batch-level costs (1 batch at $2,000)		2,000
   Total costs	$	22,500
   Cost per unit = $22,500 ÷ 1,000 = $22.50

   
   Now the avoidable cost per unit is below the revenue per unit ($23.50) that will be generated by accepting the special order. Accordingly, the special order should be accepted. The decision changes from reject to accept the special order.
   
   
   
   

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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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