Question

Andretti Company has a single product called Dak. The company normally produces and sells 60,000 Daks each year at a selling price of $32 per unit. The company’s unitcosts at this level of activity are given below:

Direct materials $10.00
Direct labor $4.50
Variable manufacturing overhead $2.30
Fixed manufacturing overhead $5.00 ($300,000 total)
Variable selling expenses $1.20
Fixed selling expenses $3.50 ($210,000 total)
Total cost per unit $26.50

Assume that Andretti has sufficient capacity to produce 90,000 Daks each year without any increase in fixed manufacturing overhead costs. The company could increaseit’s sales by 25% above the present 60,000 units each year if it were willing to increase the fixed selling expenses by $80,000. Would the increase in fixed expensesbe justified? Explain.

(Can someone please help me with this and explain if you can in a step by step manner what the answer is and how I go about getting the answer, each step andeverything, thank you very much.)

Answer 1

1.

Calculating net operating income to justify fixed selling expenses:

It is given that the direct materials are $10, direct labor is $4.50, variable manufacturing overhead is $2.30, fixed manufacturing overhead is $5, variable selling expense is $1.20, fixed selling expense is $3.50, selling price of unit is $32, increase in sales 25% and fixed selling expense $80,000.

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Incremental sales in unit = 60,000 units × 25% = 15,000 units

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Hence, the company increase sales in 25% get more net operating income as. So the increased fixed selling expenses would be justified.

2.

Calculating break-even price per unit:

It is given that the direct materials are $10, direct labor is $4.50, variable manufacturing overhead is $2.30, import duty is $1.70, cost of permits and licenses are $9,000 and shipping cost per unit is $3.20.

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Hence, the break-even price of this order is.

3.

Finding relevant cost for this situation:

In this situation relevant cost is variable selling expense per Dak. This $1.20 per unit has not occurred yet. All production costs are irrelevant because of irregular units have been already produced and cost of production are sunk. The fixed selling expenses are irrelevant because of the units sold or unsold the cost would be incurred. If the company has disposed the product the variable selling expense may not be relevant.

4.

Calculating the impact on profits of closing the unit:

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Hence, if the plant is closed for two months, the net loss is.

5.

Computing the unit cost relevant for comparing to the price quoted by the outside manufacturer:

Particulars	Amount (in $)
Variable manufacturing costs	$16.80
Fixed manufacturing overhead cost	3.75
Variable selling expense ($1.20 × 1/3)	0.40
Total costs avoided	$20.95

Hence, the outside manufacture’s quotation accountable if the unit price is less than .