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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

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 91,200 units per year is:

Direct materials $ 1.90
Direct labor $ 3.00
Variable manufacturing overhead $ 0.70
Fixed manufacturing overhead $ 3.55
Variable selling and administrative expenses $ 2.00
Fixed selling and administrative expenses $ 2.00

The normal selling price is $20.00 per unit. The companys capacity is 108,000 units per year. An order has been received from a mail-order house for 1,400 units at a special price of $17.00 per unit. This order would not affect regular sales or 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 companys inventory includes 1,000 units that are inferior quality. The units must be sold through regular channels at a reduced price. The company does not expect the selling of these inferior units to affect regular sales. What unit cost is relevant for establishing a minimum selling price for the inferior units?

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