Question

Andretti Company has a single product called a Dak. The company normally produces and sells 125,000 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 Fixed selling expenses Total cost per unit $ 6.50 11.00 2.20 6.00 ($750,000 total) 2.70 5.50 ($687,500 total) $33.90 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 156,250 Daks each year without any increase in fixed manufacturing overhead costs. The company could increase its unit sales by 25% above the present 125,000 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 fixed selling expenses? 1-b. Would the additional investment be justified? 2. Assume again that Andretti Company has sufficient capacity to produce 156,250 Daks each year. A customer in a foreign market wants to purchase 31,250 Daks. If Andretti accepts this order it would have to pay import duties on the Daks of $1.70 per unit and an additional $25,000 for permits and licenses. The only selling costs that would be associated with the order would be $2.80 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?

Answer 1

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All required answers are highlighted in yellow: Solution: 1)a incremental Contribution Margin (125000*25%)*(48-6.50-11-2.20-2.70) = Less: Incremental fixed selling expense Incremental net operating income (Financial Advantage) 800000 110000 690000 b) Yes Because, it will increase the net income by $690000. 2) (6.50+11.00+2.20) $ Variable manufacturing cost per unit Import duty per unit Permit and licences Shipping cost per unit Break even point per unit 19.70 1.70 0.80 (25000/31250) $ 2.80 25.00 $ 2.70 Relvent Unit cost Since, these units are obsoleted, in this case relvent unit cost will be equal to the variable selling cost per unit. All other cost will be deemed as sunk cost.

OR: Amount 133333.33 133333.25 Particulars Forgon Contribution Margin (5208*25.60) Total Avoidable fixed cost: Fixed Manufacturing overhead cost (750000/12*2)*65% Fixed Selling cost (687500/12*2)*20% Total Avoidable fixed cost Financial Disadvantage $ 81,250.00 $ 22,916.67 $1,04,166.67 $1,04,166.67 $ -29,166.67 $ -29,166.58 Working note: Contribution margin per unit (Sales - Variable costs) 48 - 6.50+11.00+2.20+2.70) = $ 25.60 Sales units for two months (125000/12)*2 = 25% of normal level (20833*25%) 20833 5208 No Because it will generate a financial disadvantage. Particulars Variable Manufacturing costs (6.50+11.00+2.20) Fixed Manufacturing overhead (750000/125000)*30% Variable Selling Expense (2.70/3) Avoidable cost per unit Amount 19.70 1.80 0.90 22.40