Question

Problem 11-18 Relevant Cost Analysis in a variety of Situations (LO11-2, LO11-3, LO11-4) Andretti Company has a single product called a Dak. The company normally produces and sells 123.000 Daks each year at a selling price of $46 per unit. The company's unit costs at this level of activity are given below. $ 7.50 Direct materials Direct labor Variable manufacturing overhead Pixed facturing overhead Variable selling expenses Fixed selling expenses Total cost per unit 2.20 4.00 (5492.000 total) 6.50 (5799.500 total) $12.90 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 147600 Daks each year without any increase in fored manufacturing overhead costs. The company could increase its unit sales by 20% above the present 123.000 units each year if it were willing to increase the fixed selling expenses by $100,000. What is the financial advantage (disadvantage of investing an additional $100,000 in fixed selling expenses? 1-b. Would the additional investment be justified? 2. Assume again that Andretti Company has sufficient capacity to produce 147600 Daks each year A Customer in a foreign market wants to purchase 24,600 Daks. If Andretti accepts this order it would have to pay import duties on the Daks of $3.70 per unit and an additional $12,300 for permits and licenses. The only selling costs that would be associated with the order would be $2.10 per unit shipping cost. What is the break-even price per unit on this order? 3. The company has 800 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? 4. Due to a strike in its supplier's plant, Andretti Company is unable to purchase more material for the production of Daks. The strike is expected to last for two months. Andretti Company has enough material on hand to operate at 25% of normal levels for the two-month period. As an alternative, Andretti could close its plant down entirely for the two months. If the plant were closed, fixed manufacturing overhead costs would continue at 30% of their normal level during the two-month period and the fored selling expenses would be reduced by 20% during the two-month period. a. How much total contribution margin will Andretti forgot closes the plant for two months? b. How much total fixed cost will the company avoid if it closes the plant for two months? c. What is the financial advantage (disadvantage) of closing the plant for the two-month period? d. Should Andretti close the plant for two months? 5. An outside manufacturer has offered to produce 123,000 Daks and ship them directly to Andretti's customers. If Andretti Company accepts this offer, the facilities that it uses to produce Daks would be idle; however, fixed manufacturing overhead costs would be reduced by 30%. Because the outside manufacturer would pay for all shipping costs, the variable selling expenses would be only two- thirds of their present amount. What is Andretti's avoidable cost per unit that it should compare to the price quoted by the outside manufacturer? Complete this question by entering your answers in the tabs below. Reg 1A Reg 13 Reg 3 Req 4A to 4C Reg 4D Regs Assume that Andretti Company has sufficient capacity to produce 147,600 Daks each year without any increase in fixed manufacturing overhead costs. The company could increase its unit sales by 20% above the present 123,000 units each year if it were willing to increase the fixed selling expenses by $100,000. What is the financial advantage (disadvantage) of investing an additional $100,000 in fixed selling expenses?

Answer 1

Requirement 1-a

Financial advantage

$             480,560

Calculation:

		Units
particulars	Per Unit	123,000	147,600
Sales	$ 46.00	$ 5,658,000	$ 6,789,600
Less: variable Cost
Material	$   7.50	$    922,500	$ 1,107,000
Labor	$ 11.00	$ 1,353,000	$ 1,623,600
Manufacturing Overhead	$   2.20	$    270,600	$    324,720
Selling Overhead	$   1.70	$    209,100	$    250,920
Less: Fixed Cost			$               -
Manufacturing Overhead	$   4.00	$    492,000	$    492,000
Selling Overhead	$   6.50	$    799,500	$    899,500
Net Income	$ 13.10	$ 1,611,300	$ 2,091,860

Requirement 1-b

YES

Requirement 2

Break even price per unit

$        27.50

Calculation:

Particulars	Per Unit	24,600
Variable Cost
Material	$   7.50	$    184,500
Labor	$ 11.00	$    270,600
Manufacturing Overhead	$   2.20	$      54,120
Import duties	$   3.70	$      91,020
Permits		$      24,600
Selling Overhead	$   2.10	$      51,660
Total costs		$    676,500
Units		24,600
Break even price per unit		$        27.50

Requirement 3

Relevent 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.

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