Exercise Special order

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 65,000 units per year is:

Direct materials $ 7.50 Direct labor $ 4.60 Variable manufacturing overhead $ 2.50 Fixed manufacturing overhead $ 6.90 Variable selling and administrative expense $ 2.75 Fixed selling and administrative expense $ 4.30 Total costs $ 28.55

The normal selling price is $40 per unit. The companys capacity is 90,000 units per year. A special order has been received from a mail-order house for 25,000 units at a special price of $24.00 per unit. This order would not affect regular sales or the companys total fixed costs.

1. What is the incremental revenue in total if the company accepts this special order?

2. What is the total fixed manufacturing overhead?

3. Calculate total incremental costs (relevant costs) if the company accepts this special order.

4. How would accepting the order affect Deltas operating income?

5. Should Delta accept the special order?

6. The marketing manager, Peter Kyler, argues against accepting the special order because the offer price of $24 is less than Deltas $28.55 cost to make the sunglasses. Kyler asks you, as one of Deltas staff accountants, to explain whether his analysis is correct.

7. Assume all others being equal. However, the customer demands a special design for the special order. In order to manufacture the special order, Delta company must purchase a special equipment, $170,000, for printing a specialized logo for this order. Should Delta accept the special order?