Question

Problem 11-18 Relevant Cost Analysis in a Variety of Situations [LO11-2, L011-3, L011-4) 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: Direct materials Direct labor Variable manufacturing overhead Fixed manufacturing overhead Variable selling expenses Pixed selling expenses Total cost per unit 6.50 11.00 2.80 3.00 ($363,000 total) 4.70 4.50 ($544,500 total) $32.50 A number of questions relating to the production and sale of Daks follow. Each question is independent. Required: 1-a. Assume that Andretti Company has sufficient capacity to produce 157,300 Daks each year without any increase in fixed manufacturing overhead costs. The company could increase its unit sales by 30% above the present 121,000 units each year if it were willing to increase the fixed selling expenses by $140,000. What is the financial advantage (disadvantage) of investing an additional $140,000 in fixed selling expenses? 1-b. Would the additional investment be justified? 2. Assume again that Andretti Company has sufficient capacity to produce 157,300 Daks each year. A customer in a foreign market wants to purchase 36,300 Daks. If Andretti accepts this order it would have to pay import duties on the Daks of $1.70 per unit and an additional $29,040 for permits and licenses. The only selling costs that would be associated with the order would be $2.70 per unit shipping cost. What is the break-even price per unit on this order? 3. The company has 800 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 30% 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 fixed 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 121,000 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. Req 4A to 4C Req 2 Req 5 Req 1A Req 1B Req 3 Req 4D Assume that Andretti Company has sufficient capacity to produce 157,300 Daks each year without any increase in fixed manufacturing overhead costs. The company could increase its unit sales by 30% above the present 121,000 units each year if it were willing to increase the fixed selling expenses by $140,000. What is the financial advantage (disadvantage) of investing an additional $140,000 in fixed selling expenses? Show less A Req 1A Req 1B Req 3 Req 4A to 4 Req 40 Req 1A Req 1B Req 5 Req 2 Assume that Andretti Company has sufficient capacity to produce 157,300 Daks each year without any increase in fixed manufacturing overhead costs. The company could increase its unit sales by 30% above the present 121,000 units each year if it were willing to increase the fixed selling expenses by $140,000. Would the additional investment be justified? OYes ONo KReq 1A Req 2 Req 2 Req 5 Req 1A Req 3 Req 4A to 4C Req 4D Req 1B Assume again that Andretti Company has sufficient capacity to produce 157,300 Daks each year. A customer in a foreign market wants to purchase 36,300 Daks. If Andretti accepts this order it would have to pay import duties on the Daks of $1.70 per unit and an additional $29,040 for permits and licenses. The only selling costs that would be associated with the order would be $2.70 per unit shipping cost. What is the break-even price per unit on this order? (Round your answer to 2 decimal places.) Show less Break-even price per unit Req B Req 3 Req 5 Req 4D Req 1A Req 2 Req 3 Req 4A to 4C Req 1B The company has 800 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? (Round your answer to 2 decimal places.) Relevant unit cost per unit Req 2 Req 4A to 4C Req 4D Req 3Req 4A to 4C Req 2 Req 1B Req 1A 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 30% of their normal level during the two-month period and the fixed selling expenses would be reduced by 20% during the two-month period. Should Andretti close the plant for two months? show less▲ Yes Req 5 〈 Req 4A to 4C Req 2 Req 1B Req 3Req 4A to 4C Req 5 Req 1A Req 4D An outside manufacturer has offered to produce 121,000 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 answer to 2 decimal places.) Show less Avoidable cost per unit KReq 4D Req 5X

Answer 1

Req 1A Additional Unit sold (121,000 30% 36,300 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 48.00 6.50) (11.00) (2.80) 4.70 23.00 Total Incremental Contribution (36,300 x 23.00 Less: Additional Fixed selling expense Financial Advantage 834,900 140,000 694,900 Financial Advantage 694,900 Req 1B Yes Reason: Because it will increase the income by S694,900.

Req 2 Direct Material Direct labor Variable manufacturing overhead Import Duties Permints and License ($ 29,040/36,300 Units Shipping cost Break-even price per unit 6.50 11.00 2.80 1.70 0.80 2.70 25.50 Break-even price per unit 25.50 Req 3 Relevant unit cost $4.70 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 (121,000 x 25% x 2/12) 25% of Normal Level 121,000 5,042 (5,042 x 23.00) a) Forgone contribution margin 115,966 bl Total avoidable fixed costs Fixed Manufacturing cost (363,000 x 70% x 2/12 Fixed Selling expense (544,500 x 20% x 2/12) Total Avoidable Fixed Costs S 42,350.00 18,150.00 $60,500.00 c) Financial Advantage (Disadvantage) Forgone Contribution Margin Add: Avoidable fixed costs Fin S (115,966.00 60,500.00 $(55,466.00) ancial Advantage (Disadvantage) d) No Reason because it will result a financial disadvantage of $55,466.

Req 5) Fixed manufacturing cost saving (3 x 30%) Direct material Direct labor Variable Manufacturing overhead Variable selling expense (4.70 x 1/3) Avoidable cost per unit 0.90 6.50 11.00 2.80 1.57 22.77 Avoidable cost per unit 22.77