Question

Direct materials Direct labor Variable manufacturing overhead Fixed manufacturing overhead Variable selling expenses Fixed selling expenses Total cost per unit $ 6.50 11.00 2.20 9.00 ($729,000 total) 3.70 3.00 ($243,000 total) $35.40 A number of questions relating to the production and sale of Daks follow. Each question is independent Required: 1a. Assume that Andretti Company has sufficient capacity to produce 105,300 Daks each year without any increase in fixed manufacturing overhead costs. The company could increase its unit sales by 30% above the present 81,000 units each year if it were willing to increase the fixed selling expenses by $110,000. What is the financial advantage (disadvantage) of investing an additional $110,000 in fused selling expenses? 1-b. Would the additional investment be justified? 2. Assume again that Andretti Company has sufficient capacity to produce 105,300 Daks each year. A customer in a foreign market wants to purchase 24,300 Daks. If Andretti accepts this order it would have to pay import duties on the Daks of $4.70 per unit and an additional $21,870 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 500 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 35% 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 foed 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 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?

the selling price is 64

Answer 1

Req 1A Additional Unit sold (81,000 ~ 30%) (a) 24,300 $ $ 64.00 Contribution Margin per unit Sales price per unit Less: Variable cost per unit Direct materials Direct labor Variable manufacturing overhead Variable selling expense Contribution Margin per unit (b) (6.50) (11.00) (2.20) (3.70) 40.60 $ $ $ Total Incremental Contribution (a x b) Less: Additional Fixed selling expense Financial Advantage 986,580 (110,000) 876,580 $ Financial Advantage $ 876,580 Req 1B Yes Reason: Because it will increase the income by $ 876,580.

$ Req 2 Direct Material Direct labor Variable manufacturing overhead Import Duties Permints and License ($ 21,870 / 24,300 Units) Shipping cost Break-even price per unit 6.50 11.00 2.20 4.70 0.90 1.80 $ 27.10 Break-even price per unit $ 27.10 Req3 Relevant unit cost $ 3.70 per unit Relevant unit cost is the variable selling expense because all other manufacturing variable expense are already incurred while producing the units. Therefore these are irrelevant cost. And Fixed expense are sunk cost because they have to incurr irrespective of the irregularities.

Req 4) Plant Operated Total Normal Production Production during that two months if plant operates (81,000 ~ 25% * 2/12) 25% of Normal Level 81,000 3,375 a)Contribution margin per unit Total Forgo contribution margin (3,375 * $ 40.60) $ $ 40.60 137,025 $ b) Total avoidable fixed costs Fixed Manufacturing cost (729,000 ~ 65% 2/12) Fixed Selling expense (243,000 ~ 20% 2/12) Total Avoidable Fixed Costs 78,975 8,100 87,075 $ $ c) Financial Advantage (Disadvantage) Forgone Contribution Margin Add: Avoidable fixed costs Financial Advantage (Disadvantage) (137,025) 87,075 (49,950) $ d) No, Plant should not closed for two months because of financial disadvantage of $ 49,950.

Req 5) Fixed manufacturing cost saving (9 x 30%) Direct material Direct labor Variable Manufacturing overhead Variable selling expense (3.70 1/3) Avoidable cost per unit 2.70 6.50 11.00 2.20 1.23 23.63 Avoidable cost per unit $ 23.63

.