Question

Andretti Company has a single product called a Dak. The company normally produces and sells 120,000 Daks each year at a selling price of $48 per unit. The company's unit costs at this level of activity are given below. $ 6.50 10.ee 3.89 Direct materials Direct labor Variable manufacturing overhead Fixed manufacturing overhead Variable selling expenses Fixed selling expenses Total cost per unit 2.70 6.50 (5788,000 total) $34.70 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 150,000 Daks each year without any increase in fixed manufacturing overhead costs. The company could increase its unit sales by 25% above the present 120,000 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 150,000 Daks each year. A customer in a foreign market wants to purchase 30.000 Daks. If Andretti accepts this order it would have to pay import duties on the Daks of $270 per unit and an additional $24,000 for permits and licenses. The only selling costs that would be associated with the order would be $1.70 per unit shipping cost. What is the break-even price per unit on this order? 3. The company has 500 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 35% 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 foxed cost will the company avoid if it closes the plant for two months? c. What is the financial advantage (disadvantage) of closing the plant for the two-month period? d. Should Andretti close the plant for two months?

Answer 1

1). Financial advantage (disadvantage) of investing an additional $110,000 in fixed selling expenses.

Present capacity = 150,000 daks

Currently making = 120,000 daks

Additional capacity can be used = 120000 * 25% = 30,000 daks

Incremental contribution from additional sales :

Selling price = $48

Less: Variable costs:

Direct materials =$6.50

Direct labor = $10.00

Variable manufacturing overhead = $3.0

Variable selling expenses = $2.70

Incremental contribution per unit = $25.8

Total Incremental contribution for 30,000 daks = 30,000 * $25.8 = $774,000

Less: Incremental Fixed selling expenses = $110,000

Financial advantage (disadvantage) = $664,000

1b). Yes, additional investment is justified because there is financial advantage of $664,000.

2). Calculation of Breakeven price per unit:

Total cost per unit for this outside order:-

Direct materials =$6.50

Direct labor = $10.00

Variable manufacturing overhead = $3.0

Variable selling expenses = $1.70

Import duties = $2.70

Permits and licences ($24,000 / 30000) = $0.8

Total cost per unit = $24.7

Hence the breakeven price per unit is $24.7

3). As the 500 daks are already been made and cannot be sold due to irregularities on normal price, its cost of production is sunk cost now because cost are already been incurred and cannot be recovered. The only unit cost which is relevant to these units is variable selling cost i.e. $2.70 per unit.

4).

a). Total contribution margin will Andretti forgo if it closes the plant for two months.

Contribution margin per unit = $25.8

Total contribution margin it will forgo = (120000 *25% * 2/12 )* $25.8 = $129,000

b). Total fixed cost will the company avoid if it closes the plant for two months.

Fixed manufacturing overhead ($720,000 * 65% * 2 /12) = $78,000

Fixed selling expenses ($780,000 * 20% * 2/12) = $26,000

Total avoidable fixed cost = $104,000

c). Financial advantage (disadvantage) of closing the plant for the two-month period:

Avoidable fixed cost = $104,000

Less: Loss of contribution margin = $129,000

Financial advantage (disadvantage) = $ (25,000)

d). Andretti should not close the plant for 2 month because there is financial disadvantage.

5). Andretti's avoidable cost per unit that it should compare to the price quoted by the outside manufacturer.

Direct materials =$6.50

Direct labor = $10.00

Variable manufacturing overhead = $3.0

Fixed manufacturing overhead ($6.0 * 30%) = $1.8

Variable selling expenses ($2.70 * 1/3) = $0.9

Total avoidable cost per unit = $22.2