Question

Andretti Company has a single product called a Dak. The company normally produces and sells 78,000 Daks each year at a selling price of $42 per unit. The company's unit costs at this level of activity are given below: S Direct materials Direct labor Variable manufacturing overhead Fixed manufacturing overhead Variable selling expenses Fixed selling expenses 8.50 9.00 3.70 5.00 ($390,000 total) 2.70 6.50 ($507,000 total) Total cost per unit S 35.40 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 97,500 Daks each year without any increase in fixed manufacturing overhead costs. The company could increase its sales by 25% above the present 78,000 units each year if it were willing to increase the fixed selling expenses by $120.000. Calculate the incremental net operating income. (Round all dollar amounts to 2 decimal places.) Increased sales in units Contribution margin per unit Incremental contribution margin Less added fixed selling expense Incremental net operating income 1-b. Would the increased fixed selling expenses be justified? Yes Ο Νο 2. Assume again that Andretti Company has sufficient capacity to produce 97,500 Daks each year. A customer in a foreign market wants to purchase 19.500 Daks. Import duties on the Daks would be S3.70 per unit, and costs for permits and licenses would be $11,700. The only selling costs that would be associated with the order would be $2.30 per unit shipping cost. Compute the per unit break-even price on this order. (Round your answers to 2 decimal places.) Variable manufacturing cost per unit Import duties per unit Permits and licenses Shipping cost per unit Break-even price per unit

Answer 1

1.a

Calculation of contribution margin per unit

Selling price	$42
Less: Direct materials	(8.50)
Direct Labour	(9)
Variable manufacturing overhead	(3.70)
Variable selling expense	(2.70)
Contribution margin per unit	$18.1

Increase in units(78,000×25%)	19,500
Contribution margin per unit	$18.1
Incremental contribution margin	$352,950
Less: Added fixed selling expenses	($120,000)
Incremental net operating income	$232,950

1.b

Yes, as it gives incremental net operating income of $232,950.

2. Calculation of Break even price

Variable manufacturing cost per unit(8.50+9+3.70)	21.2
Import duties per unit	3.70
Permits & licences (11,700/19,500)	0.6
Shipping cost per unit	2.30
Break even price	$27.8

3. The relevant cost is $2.70 per unit, which is the variable selling expenses per dark.

Since irregular units have already been produced, all product cost are sunk. The fixed selling expenses are not relevant because they will not change regardless the irregular units are sold or not.

4. If the plant operates at 25% of normal level then. (78,000×2\12)×25% = 3,250

Contribution margin lost (3,250×18.1)	(58,825)
Fixed costs (avoidable)
Fixed manufacturing overhead(390,000×70%)×2/12	45,500
Fixes selling cost( $507,000×20%×2/12)	16,900
Net advantage (disadvantage) of closing the plant	$3,575

5.

Variable manufacturing costs (8.50+9+3.70)	$21.2
Fixes manufacturing overhead cost(390,000×70%)/78,000	$3.5
Variable selling expense(2.70×1/2)	$0.9
Total costs avoided	$25.63

____×____

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