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 $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 $ 8.50 10.00 2.70 7.00 ($574,000 total) 1.70 3.00 ($246,000 total) $32.90 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 106,600 Daks each year without any increase in fixed manufacturing overhead costs. The company could increase its unit sales by 30% above the present 82,000 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 106,600 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 $2.70 per unit and an additional $19,680 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 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? 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 35% of their normal level during the two-month period and the fixed selling expenses would be reduced by 20% during the two-month period. a. How much total contribution margin will Andretti forgo if it 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 82,000 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. Req 1A Reg 1B Reg 2 Req3 Req 4A to 4C Req 4D Reg 5 Assume that Andretti Company has sufficient capacity to produce 106,600 Daks each year without any increase in fixed manufacturing overhead costs. The company could increase its unit sales by 30% above the present 82,000 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? Show less A

Answer 1

1). Financial advantage (disadvantage) of investing an additional $120,000 in fixed selling expenses.

Present capacity = 106,600 daks

Currently making = 82,000 daks

Additional capacity can be used = 82000 * 30% = 24,600 daks

Incremental contribution from additional sales :

Selling price = $60

Less: Variable costs:

Direct materials =$8.50

Direct labor = $10.00

Variable manufacturing overhead = $2.70

Variable selling expenses = $1.70

Incremental contribution per unit = $37.10

Total Incremental contribution for 24,600 daks = 24,600 * $37.10 = $912,660

Less: Incremental Fixed selling expenses = $130,000

Financial advantage (disadvantage) = $782,660

1b). Yes, additional investment is justified because there is a financial advantage of $782,660.

2). Calculation of Breakeven price per unit:

Total cost per unit for this outside order:-

Direct materials =$8.50

Direct labor = $10.00

Variable manufacturing overhead = $2.70

Variable selling expenses = $1.60

Import duties = $2.70

Permits and licences ($19,680 / 24600) = $0.8

Total cost per unit = $26.30

Hence the breakeven price per unit is $26.30

3). As the 900 daks are already been made and cannot be sold due to irregularities on normal price, its cost of production is sunk cost now because cost are already been incurred and cannot be recovered. The only unit cost which is relevant to these units is variable selling cost i.e. $1.70 per unit.

4).

a). Total contribution margin will Andretti forgo if it closes the plant for two months.

Contribution margin per unit = $37.10

Total contribution margin it will forgo = (82000 *25% * 2/12 )* $37.10 = $126,758.33

b). Total fixed cost will the company avoid if it closes the plant for two months.

Fixed manufacturing overhead ($574,000 * 65% * 2 /12) = $62,183.33

Fixed selling expenses ($246,000 * 20% * 2/12) = $8,200

Total avoidable fixed cost = $70,383.33

c). Financial advantage (disadvantage) of closing the plant for the two-month period:

Avoidable fixed cost = $70,383.33

Less: Loss of contribution margin = $126,758.33

Financial advantage (disadvantage) = $ (56,375)

d). Andretti should not close the plant for 2 months because there is financial disadvantage.

5). Andretti's avoidable cost per unit that it should compare to the price quoted by the outside manufacturer.

Direct materials =$8.50

Direct labor = $10.00

Variable manufacturing overhead = $2.70

Fixed manufacturing overhead ($7.0 * 30%) = $2.10

Variable selling expenses ($1.70 * 1/3) = $0.57

Total avoidable cost per unit = $23.87