Question

Andretti Company has a single product called a Dak. The company normally produces and sells 82,000 Daks each year at a selling price of $58 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 $ 6.50 10.00 2.00 4.00 ($328,000 total) 3.70 3.50 ($287,000 total) $29.70 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 102,500 Daks each year without any increase in fixed manufacturing overhead costs. The company could increase its unit sales by 25% above the present 82,000 units each year if it were willing to increase the fixed selling expenses by $120,000. What is the financial advantage (disadvantage) of investing an additional $120,000 in fixed selling expenses? 1-b. Would the additional investment be justified? 2. Assume again that Andretti Company has sufficient capacity to produce 102,500 Daks each year. A customer in a foreign market wants to purchase 20,500 Daks. If Andretti accepts this order it would have to pay import duties on the Daks of $2.70 per unit and an additional $14,350 for permits and licenses. The only selling costs that would be associated with the order would be $1.60 per unit shipping cost. What is the break-even price per unit on this order? 3. The company has 600 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? - - - - .- . - .- - .- - .- - . - . -L I . --- -- -I -- - ---- - --- - -I.- TL - - - -

Answer 1

Solutions:

58.00 Solution 1-a: Computation of Contribution Margin per unit Selling price per unit Less: variable expenses: Direct materials Direct labor Variable manufacturing Overhead Variable selling expense Contribution margin per unit 6.50 10.00 2.00 3.700 22.20 35.80 12 13 15 Increased Sales In units (82000*25%) Contribution margin per unit Incremental Contribution margin Less: Added Fixed selling expense Incremental Net Operating Income 20500 35.8 733900 120000 613900 20 Solution 1-b: Yes, Additional investment would be justified. Solution 2: 26 29 Variable Manufacturing Cost per unit Import Duties per unit Permits and licenses ($14350/20500) Shipping cost per unit Break even price per unit 18.50 2.70 0.70 1.60 23.50 30 31 33 Solution 3: 35 Relevant unit cost (Variable selling expesne) Solution 4: (a, b, c, d) 3417 35.80 122317 Units for two months (82000*25%*2/12) Contribution margin per unit Contribution margin forgone (a) Fixed costs: Fixed manufacturing overhead cost ($328000*2/12*60%) Fixed selling cost ($287000*2/12*20%) Total Fixed cost Avoidance 32800 9567 42367 Net Advantage (disadvantage) of closing the plant (c)=b-a Should Andretti close the plant for Two months? (d) NO Solution 5: Variable manufacturing cost Fixed manufacturing overhead cost ($4*30%) Variable selling expense ($3.70*1/3) Total Costs Avoided 18.50 1.20 1.23 20.93 60 et321 Sheet322 Sheet323 ) Sheet324 Sheet325 IL 0 <