Question

Andretti Company has a single product called a Dak. The company normally produces and sells 85,000 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	$	8.50
Direct labor		12.00
Variable manufacturing overhead		3.30
Fixed manufacturing overhead		4.00	($340,000 total)
Variable selling expenses		2.70
Fixed selling expenses		3.50	($297,500 total)
Total cost per unit	$	34.00

A number of questions relating to the production and sale of Daks follow. Each question is independent.

An outside manufacturer has offered to produce 85,000 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? (Do not round intermediate calculations. Round your answers to 2 decimal places.)

The Walton Toy Company manufactures a line of dolls and a sewing kit. Demand for the company’s products is increasing, and management requests assistance from you in determining an economical sales and production mix for the coming year. The company has provided the following data:

Product	Demand Next year (units)	Selling Price per Unit		Direct Materials		Direct Labor
Debbie	67,000	$	30.00	$	4.40	$	4.40
Trish	59,000	$	5.40	$	1.30	$	0.80
Sarah	52,000	$	44.00	$	8.99	$	6.80
Mike	36,000	$	16.00	$	3.70	$	5.20
Sewing kit	342,000	$	9.70	$	4.90	$	0.40

The following additional information is available:  

1. The company’s plant has a capacity of 115,750 direct labor-hours per year on a single-shift basis. The company’s present employees and equipment can produce all five products.

2. The direct labor rate of $8 per hour is expected to remain unchanged during the coming year.

3. Fixed manufacturing costs total $555,000 per year. Variable overhead costs are $4 per direct labor-hour.

4. All of the company’s nonmanufacturing costs are fixed.

5. The company’s finished goods inventory is negligible and can be ignored.

6. Assuming that direct labor-hours is the company’s constraining resource, what is the highest total contribution margin that the company can earn if it makes optimal use of its constrained resource? (Do not round intermediate calculations. Round your final answer to a whole dollar amount.)

Answer 1

1.

Direct materials	$8.5
Direct labor	12
Variable manufacturing overhead	3.3
Fixed manufacturing overhead ($4*30%)	1.2
Variable selling expense ($2.70*1/3)	0.9
Total avoidable cost per unit	$25.9