Question

year Andretti Company has a single product called a Dak. The company normally produces and sells 84,000 Daks each selling price of $58 per unit. The company's unit costs at this level of activity are given below: $ 7.50 ON Direct materials Direct labor Variable manufacturing overhead Fixed manufacturing overhead Variable selling expenses Fixed selling expenses Total cost per unit ($420,000 total) 2.50 ($210,000 total) $29.00 $29.00 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 117,600 Daks each year without any increase in fixed manufacturing overhead costs. The company could increase its unit sales by 40% above the present 84,000 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 117,600 Daks each year. A customer in a foreign market wants to purchase 33,600 Daks. If Andretti accepts this order it would have to pay Import duties on the Daks of $170 per unit and an additional $20,160 for permits and licenses. The only selling costs that would be associated with the order would be $1.50 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?

Answer 1

Answer is given below with all working

Incremental Profit 1 a) Revised Sales $6,820,800 Less: Direct Materials $882,000 $1,176,000 $270,480 $199,920 $4,292,400 Direct Labor Variable Manufacturing Overhead Variable Selling expense Contribution Margin Less: Fixed Cost Manufacturing Overhead Selling expenses Net Profit $420,000 $340,000 $3,532,400 Existing profit ($58-$29)*84,000 Incremental profit $2,436,000 $1,096,400 1 b) Additional investment would be justified because of incremental profit Break even point for special order Relevant cost Direct Materials 2 33,600 Units $252,000 $336,000 $77,280 $50,400 Direct Labor Variable Manufacturing Overhead Selling cost Import Duties Permits and licenses Total Relevant Cost $57,120 $20,160 $792,960 $33,600 Total units Break even price per unit $23.60 The relevant cost for 'seconds' will be variable manufacturing cost only Direct Material 3 $7.50 $10.00 Direct Labor Variable manufacturing overhead Total Relevant cost per unit $2.30 $19.80 Unit cost relevant for setting minimum price is $19.80 ution margin forgone Contribution per unit Units-(84,000/12*2)*25% 4 $36.50 3,500 Total Contribution forgone $127,750 a) Avoidable Fixed Cost Fixed Manufacturing Cost- 65% Fixed Selling cost 20% Total Fixed Cost $45,500 $7,000 $52,500 b) $75,250 Net disadvantage of closing plant is c) d) No Plant should not be closed down Avoidable cost per unit 5 Direct Materials Direct Labor $7.50 $10.00 Variable Manufacturing Overhead Fixed Manufacturing cost- 30% Variable selling expense 1/3 Total Avoidable cost per unit $2.30 $1.50 $0.57 $21.87