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 $56 per unit. The company’s unit costs at this level of activity are given below:

Direct materials	$	8.50
Direct labor		9.00
Variable manufacturing overhead		3.60
Fixed manufacturing overhead		4.00	($344,000 total)
Variable selling expenses		4.70
Fixed selling expenses		3.50	($301,000 total)
Total cost per unit	$	33.30

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 111,800 Daks each year without any increase in fixed manufacturing overhead costs. The company could increase its unit sales by 30% above the present 86,000 units each year if it were willing to increase the fixed selling expenses by $150,000. What is the financial advantage (disadvantage) of investing an additional $150,000 in fixed selling expenses?

1-b. Would the additional investment be justified?

2. Assume again that Andretti Company has sufficient capacity to produce 111,800 Daks each year. A customer in a foreign market wants to purchase 25,800 Daks. If Andretti accepts this order it would have to pay import duties on the Daks of $3.70 per unit and an additional $18,060 for permits and licenses. The only selling costs that would be associated with the order would be $1.80 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 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 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?

Answer 1

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Andretti
Variable cost per unit		Note
Direct Materials	8.50	A
Direct Labor	9.00	B
Variable Manufacturing overhead	3.60	C
Variable Selling Expenses	4.70	D
Total Variable cost per unit	25.80	E=A+B+C+D
Sell Price Per unit	56.00	F
Contribution Per unit	30.20	G=F-E
Number of Units	86,000.00	H
Contribution amount	2,597,200.00	I=G*H
Fixed cost
Fixed manufacturing overhead	344,000.00	J
Fixed selling expenses	301,000.00	K
Total Fixed cost	645,000.00	L=J+K
Net Income	1,952,200.00	M=I-L
Ans 1 a
Increase in Units	25,800.00	N=H*30%
Contribution Per unit	30.20	G
Contribution Amount	779,160.00	O=N*G
Extra selling expenses	150,000.00	P
Net Income	629,160.00	Q=O-P
Ans 1 b
The net income will increase by $ 629,160 so yes the additional investment is justified.
Ans 2- Foreign Market
Total Variable cost per unit	25.80	E
Less: Present Variable Selling Expenses	4.70	D
Add: Shipping costs	1.80
Add: Import Duties	3.70
Revised Variable cost per unit	26.60	R
Additional permits and licenses	18,060.00	S
Number of units	25,800.00	N
Permits and licenses cost per unit	0.70	T=S/N
Break-even price per unit	27.30	U=R+T
Ans 3- Seconds Units
Only Variable unit cost figure is relevant for setting a minimum selling price. Here as the units are seconded so Andretti may also not incur variable selling expenses. So relevant variable cost per unit will be- $ 25.80- $ 4.70= $ 21.10.
Total relevant Variable cost per unit of $ 21.10 is the relevant minimum selling price.
Ans 4 a	Plant close
Number of units	14,333.33	V=H/12*2
Contribution Per unit	30.20	G
Contribution lost	432,866.67	W=U*G
Ans 4 b
Savings in Fixed manufacturing overhead by 60%	(34,400.00)	X=J/12*2*60%
Savings in Fixed selling expenses by 20%	(10,033.33)	Y=K/12*2*20%
Total fixed cost to be avoided	(44,433.33)
Net Financial disadvantage of closing the plant	388,433.33	Z=W+X+Y
Ans 4 c	25% capacity
Number of units	3,583.33	AA=H/12*2*25%
Contribution Per unit	30.20	G
Contribution earned	108,216.67	AB=AA*G
Fixed manufacturing overhead	57,333.33	AC=J/12*2
Fixed selling expenses	50,166.67	AD=K/12*2
Net Financial advantage at 25% capacity	(716.67)	AE=AB-AC-AD
Ans 4 d
So Andretti should not close the plant for two months but operate it at 25% capacity.
Ans 5
Variable cost per unit
Direct Materials	8.50	A
Direct Labor	9.00	B
Variable Manufacturing overhead	3.60	C
Variable Selling Expenses	1.57	AF=D*1/3
Total avoidable Variable cost per unit	22.67	AG=A+B+C+AF
Fixed cost
Avoidable Fixed manufacturing overhead by 30%	(103,200.00)	AH=J*30%
Number of Units	86,000.00	H
Avoidable Fixed manufacturing overhead per unit	(1.20)	AI=AH/H
Avoidable cost per unit	21.47	AJ=AG+AI