Question

Andretti Company has a single product called a Dak. The company normally produces and sells 84,000 Daks each year at a selling price of $56 per unit. The company's unit costs at this level of activity follow Direct materials Direct labour Variable manufacturing overhead Fixed manufacturing overhead Variable selling expenses Fixed selling expenses $18.00 12.50 10.30 5.00 3.60 3.50 $420,000 total $294,000 total Total cost per unit $52.90 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 84,000 units each year if it were willing to increase the fixed selling expenses by $30,000. a. Calculate the incremental net operating income. (Do not round intermediate calculations.) Incremental net operating income

Answer 1

Contribution margin per Dak = selling price per Dak - variable cost per Dak

= 56 - 18-12.5-10.3-3.6

=$11.6

1.additional contribution margin = 21000*11.6 =$243,600

Less: additional cost =$30,000

Net benefit =$213,600

Yes

2.break even price =18+12.50+10.30+3.30+5.60+12600/28000

=$50.15 per unit

3. Relevant cost is the variable selling cost since manufacturing cost has already been incurred

I.e. $3.60 per unit

4.operating level = 84,000*30%*2/12 =4,200 units

A. Contribution margin lost = 4200*11.6 =$48,720

B. Fixed costs avoided = 420,000*40%*2/12 + 294,000*20%*2/12

=$37,800

C. Advantage = 37,800- 48,720 =$(10,920)

D.should not close

5. Avoidable cost = 18+12.50+10.30+3.6*1/3 + 420000*75%/84000

=$45.75 per unit