Question

Req 1A Reg 1B Reg 2 Reg 3 Req 4A to 4C Req 4D Reg 5 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 30% of their normal level during the two-month period and the fixed selling expenses would be reduced by 20% during the two-month period. Should Andretti close the plant for two months? Show less Yes ONO

Answer 1

Solution:

Solution 1-a:
Computation of Contribution Margin per unit
Selling price per unit		64.00
Less: variable expenses:
Direct materials	9.50
Direct labor	9.00
Variable manufacturing Overhead	3.00
Variable selling expense	2.70	24.20
Contribution margin per unit		39.80
Increased Sales In units (90000*35%)	31500
Contribution margin per unit	$39.80
Incremental Contribution margin	$1,253,700.00
Less: Added Fixed selling expense	$120,000.00
Incremental Net Operating Income	$1,133,700.00
Solution 1-b:
Yes, Additional investment would be justified.
Solution 2:
Variable Manufacturing Cost per unit	$21.50
Import Duties per unit	$2.70
Permits and licenses ($28,350/31500)	$0.90
Shipping cost per unit	$2.10
Break even price per unit	$27.20
Solution 3:
Relevant unit cost (Variable selling expesne)	$2.70
Solution 4: (a, b, c, d)
Units for two months (90000*25%*2/12)	3750
Contribution margin per unit	$39.80
Contribution margin forgone (a)	$149,250.00
Fixed costs:
Fixed manufacturing overhead cost (810000*2/12*70%)	$94,500.00
Fixed selling cost ($315000*2/12*20%)	$10,500.00
Total Fixed cost Avoidance	$105,000.00
Net Advantage (disadvantage) of closing the plant (c )= b-a	-$44,250.00
Should Andretti close the plant for Two months? (d)	No
Solution 5:
Variable manufacturing cost	21.50
Fixed manufacturing overhead cost ($9*30%)	2.70
Variable selling expense ($2.70*1/3)	0.90
Total Costs Avoided	25.10