Question

Andretti Company has a single product called a Dak. The company normally produces and sells 90,000 Daks each year at a selling price of $62 per unit. The company’s unit costs at this level of activity follow:

Direct materials	$	20.00
Direct labour		14.50
Variable manufacturing overhead		12.30
Fixed manufacturing overhead		5.00	$450,000 total
Variable selling expenses		4.20
Fixed selling expenses		3.50	$315,000 total
Total cost per unit	$	59.50

A number of questions relating to the production and sale of Daks follow. Consider each question separately.

Required:

1.

Assume that Andretti Company has sufficient capacity to produce 150,000 Daks every year without any increase in fixed manufacturing overhead costs. The company could increase its sales by 25% above the present 90,000 units each year if it were willing to increase the fixed selling expenses by $31,250.

a.	Calculate the incremental net operating income. (Do not round intermediate calculations.)
	Incremental net-operating income:

b.	Would the increased fixed expenses be justified?
	Yes No

2.

Assume again that Andretti Company has sufficient capacity to produce 150,000 Daks every year. A customer in a foreign market wants to purchase 30,000 Daks. Import duties on the Daks would be $3.70 per unit, and costs for permits and licences would be $13,500. The only selling costs that would be associated with the order would be $6.20 per unit shipping cost. Compute the per-unit break-even price on this order. (Do not round intermediate calculations. Round your answer to 2 decimal places.) Break-even price per unit:

3.

The company has 2,000 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 unit cost figure is relevant for setting a minimum selling price? (Round your answer to 2 decimal places.) Relevant Unit cost:

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 materials on hand to continue to operate at 30% 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 overhead costs would continue at 60% of their normal level during the two-month period; the fixed selling costs would be reduced by 20% while the plant was closed. What would be the dollar advantage or disadvantage of closing the plant for the two-month period? (Do not round intermediate calculations.) ...............................

5.

An outside manufacturer has offered to produce Daks for Andretti Company and to 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 overhead costs would be reduced by 75% of their present level. Since the outside manufacturer would pay all the costs of shipping, the variable selling costs would be only two-thirds of their present amount. Compute the unit cost figure relevant for comparison to whatever quoted price is received from the outside manufacturer. (Do not round intermediate calculations. Round your answer to 2 decimal places.) Total avoidable unit cost:

      

Answer 1

Calculation of contribution margin per Dak
Selling price	62
Less: variable costs
Direct Material	20
Direct Labor	14.50
Variable Overhead	12.30
Variable Selling Expenses	4.20
Total Variable cost	51
Contribution Margin per Unit	11
1-a Financial Advantage = Additional contribution Margin - Increased expenses
=22,500*11 – 31,250 = $216,250
1-B yes, since benefit
2.Calculation of break even price
Direct Material	20
Direct Labor	14.50
Variable Overhead	12.30
Import Duties	3.70
Selling expenses	6.20
Total variable cost	56.7
Break even price = 56.7 + 13500/30,000 = $57.15
3.Relevant cost is the variable selling expense since manufacturing cost has already been incurred i.e. $4.20 per unit
Operating level = 90,000*30%*2/12 = 4,500 units
4-a. Contribution margin foregone = 4500*11 = $49,500
4-b Fixed cost avoided = 450,000*40%*2/12 + 315,000*20%*2/12 = $40,500
c.Advantage of closing = 40,500-49,500 = -$9,000 i.e. disadvantage
d.No, should not close
5.Calculation of avoidable cost
Direct Material	20
Direct Labor	14.50
Variable Overhead	12.30
Avoidable Fixed manufacturing overhead	3.75
Variable selling expenses avoided	1.4
Avoidable cost per unit	51.95