Question

Andretti Company has a single product called a Dak. The company normally produces and sells 80,000 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 Direct labor Variable manufacturing overhead Fixed manufacturing overhead Variable selling expenses Fixed selling expenses Total cost per unit 6.50 11.00 3.00 7.00 ($560,000 total) 4.70 5.50 ($440,000 total) 37.70 $ 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 104,000 Daks each year without any increase in fixed manufacturing overhead costs. The company could increase its sales by 30% above the present 80,000 units each year if it were willing to increase the fixed selling expenses by $120,000. Calculate the incremental net operating income. (Round your answers to the nearest whole number.) Increased sales in units Contribution margin per unit Incremental contribution margin Less added fixed selling expense Incremental net operating income

Answer 1

Answer 1-a

Increased Sales in units	$   24,000
Conribution margin per unit	$     16.80
Incremental Contribution	$ 403,200
Added Fixed expense	$ 120,000
Incremental net income	$ 283,200

Answer 1-b

Yes

Answer 2

Variable Cost per Unit	$     20.50
Import duties per unit	$       1.70
Permits	$       0.80
Shipping Cost	$       1.70
Break even price per unit	$     24.70

Answer 3

Relevant unit cost

$            4.70

Only Variable selling cost is considered. This is because all other costs are already incurred and are irrelevant for decision making.

Answer 4

Contribution lost		$ 336,000
Fixed Cost
Manufacturing	$ 336,000
Selling	$   88,000	$ 424,000
Net Advantage		$   88,000

Answer 5

Variable manufacturing Cost	$ 20.50
Fixed manufacturing Cost	$   2.10
Variable Selling expense	$   1.57
Total cost avoided	$ 24.17

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