Question

i cannot figure out how to solve problems 4b,4c and 5

Andretti Company has a single product called a Dak. The company normally produces and sells 89,000 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 Direct labor Variable manufacturing overhead Fixed manufacturing overhead Variable selling expenses Fixed selling expenses Total cost per unit $ 9.50 12.00 2.50 9.00 ($801,000 total) 2.70 3.00 ($267,000 total) $38.70 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 111,250 Daks each year without any increase in fixed manufacturing overhead costs. The company could increase its unit sales by 25% above the present 89,000 units each year if it were willing to increase the fixed selling expenses by $120,000. What is the financial advantage (disadvantage) of investing an additional $120,000 in fixed selling expenses? 1-b. Would the additional investment be justified? 2. Assume again that Andretti Company has sufficient capacity to produce 111.250 Daks each year. A customer in a foreign market wants to purchase 22,250 Daks. If Andretti accepts this order it would have to pay import duties on the Daks of $270 per unit and an additional $15,575 for permits and licenses. The only selling costs that would be associated with the order would be $2.50 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 regularities, 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 expected to last for two months Andretti Company has enough material on hand to operate at 25% of normal levels for the two months period. As an alternative, Andretti could close its plont 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 < Prev 5 of 8 !!! Next >

Answer 1

According to your requirement, we have to solve the part 4b, 4c and 5.

Requirement 4a:- How much total contribution margin will be Andretti forgo if it is closes the plant for two months?

Solution:-

Forgone Contribution Margin (Working Note)

$434,606.90

Working Note:-

Unit sales of Dak for 2 months = 89,000 units * 2 / 12 = 14,833.33  or 14,833 units

Current contribution margin per unit = Sales - Direct Materials - Direct Labor - Variable Manufacturing overhead - Variable Selling overhead

Current contribution margin per unit = $56 - $9.5 - $12 - $2.5 - $2.7

Current contribution margin per unit = $29.3

Total amount of Contribution margin forgone = 14,833 * $29.3 = $434,606.90

Requirement 4b:- How much total fixed cost will the company avoid if it closes the plant for 2 months?

Solution:-

Total avoidable fixed Costs (Working Note)

$102,350

Working Note:-

Fixed Manufacturing Overhead per month = $801,000 / 12 = $66,750

Total fixed manufacturing overhead cost avoided = ($66,750 * 2) * 70%  = $93,450                     

# 70%   (100% - 30%) given

Total fixed selling expenses per month = $267,000 / 12 = $22,250

Total fixed selling expenses avoided = ($22,250 * 2) * 20% reduced = $8,900

Total Fixed Costs avoided if the plant closed for 2 months = $93,450 + $8,900 = $102,350

Requirement 4c:- What is the financial advantage (disadvantage) of closing the plant for two-month period?

Solution:-

Financial advantage (disadvantage) (Working Note)

$(144,998.27)

Working Note:-

If plant does not close and operates at 25% of Capacity for 2 months.

Total Contribution = $434,606.90 (Calculated above) * 25% = $108,651.73

Profit over 2 months = Total contribution - Total fixed cost

Profit over 2 months = $108,651.73 - ($66,750 * 2) - ($22,250 * 2)

Profit over 2 months = $108,651.73 - $133,500 - $44,500

Profit over 2 months = $(69,348.27) Loss

	Operate at 25% Capacity	Close for 2 months
Contribution Margin	$108,651.73	$0
Total Fixed Manufacturing Overhead	$(133,500)	$(40,050) ($66,750 * 2) * 30%
Total Fixed Selling Expenses	$(44,500)	$(35,600) ($22,250 * 2) * 80%
Profit (Loss)	$(69,348.27)	$(75,650)

The financial disadvantage of closing the plant for two months is a loss of $144,998.27 ($75,650 + $69,348.27)

Note:- Andretti should not close the plant.

Requirement 5:- An outside manufacturer has offered to produce 89,000 Daks and ship them directly to Andretti's customers.

Solution:-

Avoidable Cost per unit (Working Note)

$28.5

Working Note:-

a. Saving in Fixed Manufacturing overhead Cost per unit :- ($801,000 * 30% reduced) / 89,000 units = $2.7

b. Saving in Variable Selling expense per unit = $2.7 * 2/3 = $1.8

C. Saving in direct materials = $9.5

d. Saving in direct labor = $12

e. Saving in variable manufacturing overhead = $2.5

Total avoidable cost per unit = $2.7 + $1.8 + $9.5 + $12 + $2.5

Total avoidable cost per unit = $28.5

Thank you...

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