Question

Andretti Company has a single product called a Dak. The company normally produces and sells 121,000 Daks each year at a selling price of $48 per unit. The company’s unit costs at this level of activity are given below:

Assume that Andretti Company has sufficient capacity to produce 163,350 Daks each year without any increase in fixed manufacturing overhead costs. The company could increase its unit sales by 35% above the present 121,000 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?

Direct materials	$	6.50
Direct labor		9.00
Variable manufacturing overhead		3.60
Fixed manufacturing overhead		5.00	($605,000 total)
Variable selling expenses		1.70
Fixed selling expenses		5.50	($665,500 total)
Total cost per unit	$	31.30

Answer 1

	Current sale	Increase in fixed expense by $150,000	Financial advantgae (disadvantage)
Sales	121,000*$48 = $5,808,000	$5,808,000*135% = $7,840,800	$                                                       2,032,800
Less: Direct materials	121,000*$6.50 = $786,500	$786,500*135% = $1,061,775	$                                                        (275,275)
Less: Direct labor	121,000*$9 = $1,089,000	$1,089,000*135% = $1,470,150	$                                                        (381,150)
Less: Variable manufacturing overhead	121,000*$3.6 = $435,600	$435,600*135% = $588,060	$                                                        (152,460)
Less: Fixed manufacturing overhead	$                                   605,000	$                                                               605,000	$                                                                        -
Less: Variable selling expenses	121,000*$1.70 = $205,700	$205,700*135% = $277,695	$                                                          (71,995)
Less: Fixed selling expenses	$                                   665,500	$665,500+$150,000 = $815,500	$                                                        (150,000)
Net income	$                                2,020,700	$                                                            3,022,620	$                                                       1,001,920

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