Question

Andretti Company has a single product called a Dak. The company normally produces and sells 81,000 Daks each year at a selling price of $62 per unit. The company's unit costs at this level of activity are given below. $ Direct materials Direct labor Variable manufacturing overhead Pixed manufacturing overhead Variable selling expenses Fixed selling expenses Total cost per unit 8.50 9.00 3.60 4.00 (8324,000 total) 3.70 4.00 (5324,000 total) $32.80 A number of questions relating to the production and sale of Daks follow. Each question is independent Required: 5. An outside manufacturer has offered to produce 81,000 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. Reg 5 An outside manufacturer has offered to produce 81,000 Daks and ship them directly to Andrettis 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? (Do not round Intermediate calculations. Round your answers to 2 decimal places.) Show less s 2880 midable cost per unit

Answer 1

Avoidable cost means the costs which can be avoided if the activity is not undertaken or is altogether eliminated.

If Outsourced manufacturers offer is accepted than manufacturing activity will not be undertaken by the company.

Calculating Avoidable Cost due to outsourcing of manufacturing activity

Variable costs:	Per Unit	Total Avoidable Cost	Calculations
Direct materials	8.50	688500
Direct labor	9.00	729000
Variable Manufacturing Overhead	3.60	291600
Fixed Manufacturing Overhead	1.20	97200	(324000 x 30%)
Variable Selling Overhead	1.23	99900	(3.7 x 1/3 x 81000)
Fixed Selling Overhead	4.00	324000
Total Relevant Cost	$27.53	$2,230,200

Avoidable cost per unit is $27.53.

Note:-

1. Fixed manufacturing Overhead would be reduced by 30% (324000 x 30% = 97200)

2. Variable Selling Overhead would be only 2/3 of present amount, hence 1/3 of variable selling Overhead would be avoided. (therefore 3.7 x 81000 x 1/3 = $99900 would be avoided)

3. It is assumed that Fixed Selling Overhead would also be avoided, as the outside manufacturer would pay for all shipping costs. ( $324000 would be avoided)