Question

Andretti Company has a single product called a Dak. The company normally produces and sells 121,000 Daks each year at a selling price of $44 per unit. The company's unit costs at this level of activity are given below: Direct materials Direct labor Variable manufacturing overhead Fixed manufacturing overhead Variable selling expenses Fixed selling expenses Total cost per unit $8.50 9.00 3.60 3.00 ($363,000 total) 1.70 5.50 ($665,500 total) $31.30 A number of questions relating to the production and sale of Daks follow. Each question is independent. Required: 1-a. Assume that Andretti Company has sufficient capacity to produce 151,250 Daks each year without any increase in fixed manufacturing overhead costs. The company could increase its unit sales by 25% above the present 121,000 units each year if it were willing to increase the fixed selling expenses by $130,000. What is the financial advantage (disadvantage) of investing an additional $130,000 in fixed selling expenses? 1-b. Would the additional investment be justified? 2. Assume again that Andretti Company has sufficient capacity to produce 151,250 Daks each year. A customer in a foreign market wants to purchase 30,250 Daks. If Andretti accepts this order it would have to pay import duties on the Daks of $2.70 per unit and an additional $18,150 for permits and licenses. The only selling costs that would be associated with the order would be $2.70 per unit shipping cost. What is the break-even price per unit on this order? 3. The company has 700 Daks on hand that have some irregularities and are therefore considered to be "seconds." Due to the irregularities, it will be impossible to sell these units at the normal price through regular distribution channels. What is the unit cost figure that is relevant for setting a minimum selling price?

***I only need answers for questions 3,4 and 5. Thank you

Answer 1

Answer 3

Relevant unit cost

$       1.70

Explanation:

Only Variable selling cost is considered. This is because all other costs are already incurred and are irrelevant for decision making.

Answer 4-a

$ 641,300

Explanation:
Contribution lost = (Selling price – Variable cost) * Units

= ($ 44 - $ 22.8) * 30,250

= $ 641,300

Answer 4-b

$ 350,900

Explanation:
Fixed cost saved = ($ 363,000 * 0.6) + (665,500 * 0.2)

= $ 350,900

Answer 4-c

$ 290,400

Explanation:

Financial Disadvantage = Contribution lost - Fixed cost saved

= $ 641,300 - $ 350,900

= $ 290,400

Answer 4-d

No

Answer 5

$ 22.57

Explanation:

Avoidable cost per unit = $ 8.5 + $ 9.00 + $ 3.60 + $ (108,900/121,000) + $ 0.57

= $ 22.57

In case of any doubt, please comment.