Delta Screen Corporation is currently operating at 60% of capacity and producing 6,000 screens annually. The normal
Question:
Delta Screen Corporation is currently operating at 60% of capacity and producing 6,000 screens annually. The normal selling price is $750 per screen. They recently received an offer from a company in Germany to purchase 2,000 screens for $500 per unit. Delta has not previously sold products in Germany. Budgeted production costs for 6,000 and 8,000 screens follow:
| Units Produced | 6,000 | 8,000 |
| Direct Materials Cost | $ 750,000 | $ 1,000,000 |
| Direct Labor Cost | 750,000 | 1,000,000 |
| Variable Overhead | 900,000 | 1,200,000 |
| Fixed Overhead | 1,200,000 | 1,200,000 |
| Total Cost | 3,600,000 | 4,400,000 |
| Full Cost per Unit | 600 | 550 |
Delta’s marketing manager believes that although the price offered by the German customer is lower than current price, the order should be accepted to gain a foothold in the German market. The production manager, however, believes that the order should be rejected because the unit cost is higher than the price offered.
Instructions
a. What is the variable cost of producing one screen?
b. If the president of Delta were to call on you to resolve the difference in opinion, what would you recommend? How much would Delta’s income increase or decrease if it accepts the German order? What non-financial considerations should be included in your analysis?
c. If Delta is operating at capacity, should it accept the German order? How much would its income increase or decrease if it does?
d. If Delta is operating at 9,000 units, and it accepts the German order, what would be the effect on its income? (Assume it can’t accept a partial order. It must either accept the full 2,000 unit order or reject the entire order.)
Expert Answer:
a The variable cost of producing one screen is calculated as Total variable cost Units produced 7500... View the full answer
