Determining Whether to Accept a Special Order [LO1 CC5]

Delta Company produces a single product. The cost of producing and selling a single unit of this product at the companys normal activity level of 60,000 units per year is as follows:

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Direct materials	$6.10
Direct labour	3.80
Variable manufacturing overhead	2.00
Fixed manufacturing overhead	4.20
Variable selling and administrative expense	2.50
Fixed selling and administrative expense	2.40

The normal selling price is $25 per unit. The companys 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 $16 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 companys total fixed costs.)

2. How will your answer change if the order from the mail-order house is for 20,000 units? (Computations are not required to answer this question.)

3. Assume the company has 1,000 units of this product left over from last year that are vastly inferior to the current model. The units must be sold through regular channels at reduced prices. What unit cost figure is relevant for establishing a minimum selling price for these units? Explain your answer.