Question

Andretti Company has a single product called a Dak. The company normally produces and sells 89,000 Daks each year at a selling price of $60 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 9.00 3.10 5.00 $445,000 total) 3.70 3.00 ($267,000 total) $ 30.30 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 106,800 Daks each year without any increase in fixed manufacturing overhead costs. The company could increase its unit sales by 20% above the present 89,000 units each year if it were willing to increase the fixed selling expenses by $140,000. What is the financial advantage (disadvantage) of investing an additional $140,000 in fixed selling expenses? 1-b. Would the additional investment be justified? 2. Assume again that Andretti Company has sufficient capacity to produce 106,800 Daks each year. A customer in a foreign market wants to purchase 17,800 Daks. If Andretti accepts this order it would have to pay import duties on the Daks of $4.70 per unit and an additional $12,460 for permits and licenses. The only selling costs that would be associated with the order would be $2.50 per unit shipping cost. What is the break-even price per unit on this order? 3. The company has 900 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?

Answer 1

	Contribution margin
	selling price per unit				60
	less Variable expenses
	direct materials			6.5
	direct labor			9
	Variable manufacturing overhead			3.1
	variable selling expense			3.7	22.3
	Contribution margin per unit				37.7
Req 1A	increased sales in units			(89000*20%)=		17800
	contribution margin per unit					37.7
	incremental contribution margin					671060
	less added fixed selling expense					140,000
	incremental net operarting income					531,060
1-b)	Yes
Req 2	Break even price per unit
	Variable manufacturing cost per unit			18.6
	Shipping cost			2.5
	import duties			4.7
	permits &licences			0.7
	Break even price per unit			26.5	answer
Req 3	Relevant unit cost		$3.70	per unit
4)	Foregone contribution margin			(3708*37.7)				139791.60
	total avoidable fixed cost
	fixed manufacturing overhead cost				(445000*2/12)*70%		51916.67
	fixed selling cost				(267000*2/12)*20%		8900	60816.67
	Financial disadvantage							-78974.93
	89000*2/12*25%=			3708.333	units
	No
5)	Variable manfuacturing costs						18.6
	fixed manufacturing overhead cost				(5*30%)=		1.5
	variable selling expense				3.7*1/3		1.23
	total costs avoided						21.33