Question

Andretti Company has a single product called a Dak. The company normally produces and sells 122,000 Daks each year at a selling price of $42 per unit. The company's unit costs at this level of activity are given below: Direct materials Direet labor Variable manufacturing overhead Fixed manufacturing overhead Variable selling expenses Fixed selling expenses Total cost per unit $ 7.50 8.00 2.70 5.00 ($610,000 total) 4.70 4.50 ($549,000 total) $32.40 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 158,600 Daks each year without any increase in fixed manufacturing overhead costs. The company could increase its unit sales by 30% above the present 122,000 units each year if it were willing to increase the fixed selling expenses by $120,000. What is the financial advantage (disadvantage) of Investing an additional $120,000 in fixed selling expenses? 1-b. Would the additional investment be justified? 2. Assume again that Andretti Company has sufficient capacity to produce 158.600 Daks each year. A customer in a foreign market wants to purchase 36,600 Daks. If Andretti accepts this order it would have to pay Import duties on the Daks of $4.70 per unit and an additional $18,300 for permits and licenses. The only selling costs that would be associated with the order would be $1.40 per unit shipping cost. What is the break-even price per unit on this order? 3. The company has 600 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?

Answer 1

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Andretti
Variable cost per unit
Direct Materials	7.50	A
Direct Labor	8.00	B
Variable Manufacturing overhead	2.70	C
Variable Selling Expenses	4.70	D
Total Variable cost per unit	22.90	E=A+B+C+D
Sell Price Per unit	42.00	F
Contribution Per unit	19.10	G=F-E
Number of Units	122,000.00	H
Contribution amount	2,330,200.00	I=G*H
Fixed cost
Fixed manufacturing overhead	610,000.00	J
Fixed selling expenses	549,000.00	K
Total Fixed cost	1,159,000.00	L=J+K
Net Income	1,171,200.00	M=I-L
Ans 1 a
Increase in Units	36,600.00	N=H*30%
Contribution Per unit	19.10	G
Contribution Amount	699,060.00	O=N*G
Extra selling expenses	120,000.00	P
Net Income	579,060.00	Q=O-P
Ans 1 b
The net income will increase by $ 579,060 so yes the additional investment is justified.
Ans 2- Foreign Market
Total Variable cost per unit	22.90	E
Less: Present Variable Selling Expenses	4.70	D
Add: Shipping costs	1.40
Add: Import Duties	4.70
Revised Variable cost per unit	24.30	R
Additional permits and licenses	18,300.00	S
Number of units	36,600.00	N
Permits and licenses cost per unit	0.50	T=S/N
Break-even price per unit	24.80	U=R+T
Ans 3- Seconds Units
Only Variable unit cost figure is relevant for setting a minimum selling price.
Total Variable cost per unit of $ 22.90 is the relevant minimum selling price.
Ans 4 a	Plant close
Number of units	20,333.33	V=H/12*2
Contribution Per unit	19.10	G
Contribution lost	388,366.67	W=U*G
Ans 4 b
Savings in Fixed manufacturing overhead by 30%	(30,500.00)	X=J/12*2*30%
Savings in Fixed selling expenses by 20%	(18,300.00)	Y=K/12*2*20%
Total fixed cost to be avoided	(48,800.00)
Net Financial disadvantage of closing the plant	339,566.67	Z=W+X+Y
Ans 4 c	25% capacity
Number of units	5,083.33	AA=H/12*2*25%
Contribution Per unit	19.10	G
Contribution earned	97,091.67	AB=AA*G
Fixed manufacturing overhead	101,666.67	AC=J/12*2
Fixed selling expenses	91,500.00	AD=K/12*2
Net Financial advantage at 25% capacity	96,075.00	AE=AB-AC-AD
Ans 4 d
So Andretti should not close the plant for two months but operate it at 25% capacity.
Ans 5
Variable cost per unit
Direct Materials	7.50	A
Direct Labor	8.00	B
Variable Manufacturing overhead	2.70	C
Variable Selling Expenses	3.13	AF=D*2/3
Total Variable cost per unit	21.33	AG=A+B+C+AF
Fixed cost
Avoidable Fixed manufacturing overhead by 30%	(183,000.00)	AH=J*30%
Number of Units	122,000.00	H
Avoidable Fixed manufacturing overhead per unit	(1.50)	AI=AH/H
Avoidable cost per unit	19.83	AJ=AG+AI