Question

_{Andretti Company has a single product called a Dak. The company normally produces and sells 86,000 Daks each year at a selling price of $58 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 $ 7.50 9.00 2.50 6.00 ($516,000 total) 1.70 4.00 ($344,000 total) $30.70 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 107,500 Daks each year without any increase in fixed Emanufacturing overhead costs. The company could increase its unit sales by 25% above the present 86,000 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 107,500 Daks each year. A customer in a foreign market wants to purchase 21,500 Daks. If Andretti accepts this order it would have to pay import duties on the Daks of $1.70 per unit and an additional $10,750 for permits and licenses. The only selling costs that would be associated with the order would be $2.40 per unit shipping cost. What is the break-even price per unit on this order? 3. The company has 600 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 40% 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 86,000 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 Ereduced 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?}

Answer 1

Solutions:

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58.00 Solution 1-a: Computation of Contribution Margin per unit Selling price per unit Less: variable expenses: Direct materials Direct labor Variable manufacturing Overhead Variable selling expense Contribution margin per unit 7.50 9.00 2.50 1.700 11 20.70 37.30 12 13 14 15 16 17 Increased Sales In units (86000*25%) Contribution margin per unit Incremental Contribution margin Less: Added Fixed selling expense Incremental Net Operating Income 21500 37.3 801950 140000 661950 18 19 20 21 22 Solution 1-b: Yes, Additional investment would be justified. 23 25 Solution 2: 27 Variable Manufacturing Cost per unit Import Duties per unit Permits and licenses ($10750/21500) Shipping cost per unit Break even price per unit 19.00 1.70 0.50 2.40 23.60 31 33 Solution 3: Relevant unit cost (Variable selling expesne) Solution 4: (a, b, c, d) 3583 37.30 133658 Units for two months (86000*25%*2/12) Contribution margin per unit Contribution margin forgone (a) Fixed costs: Fixed manufacturing overhead cost ($516000*2/12*60% Fixed selling cost ($344000*2/12*20%) Total Fixed cost Avoidance 51600 11467 63067 Net Advantage (disadvantage) of closing the plant (c)=b| -70592 Should Andretti close the plant for Two months? (d) No Solution 5: 56 57 58 59 Variable manufacturing cost Fixed manufacturing overhead cost ($6*30%) Ivariable selling expense ($1.70*1/3) Total Costs Avoided 19.00 1.80 0.57 21.37 et321 Sheet322 Sheet323 ) Sheet324 Sheet325