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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 are given below: $ 6.50 Direct materials Direct labor 8.00 Variable manufacturing overhead Fixed manufacturing overhead Variable selling expenses Fixed selling expenses 3.70 7.00 ($630,000 total) 4.70 4.50 $405,000 total) $34.40 Total cost per unit 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 117,000 Daks each year without any increase in fixed manufacturing overhead costs. The company could increase its unit sales by 30% above the present 90,000 units each year if it were willing to increase the fixed selling expenses by $100,000. What is the financial advantage (disadvantage) of investing an additional $100,000 1-b. Would the additional investment be justified? 2. Assume again that Andretti Company has sufficient capacity to produce 117,000 Daks each year. A customer in a foreign market wants to purchase 27,000 Daks. If Andretti accepts this order it would have to pay import duties on the Daks of $2.70 per unit and an additional $16,200 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 400 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. fixed selling expenses?

Answer 1

Andretti Company
1-a Calculation Of incremental Income
Revenue :-
S.P p.u		62
Expenses :-
DM	6.5
DL	8
Var. Mfg. OH	3.7
Var. Selling and Adm. Exp.	4.7
Total expenses		22.9
Contribution margin p.u		39.1
Increased sale in units		27000
Contribution Margin per unit		39
Incremental Contribution Margin		10,55,700
Less:- Fixed Selling expenses		1,00,000
Net incremental Income		9,55,700
yes, the increased fixed expenses would be justified.
2 - Break even price
Variable Mfg. cost per unit	18.2	( 6.5 + 8 + 3.7 )
Import duties per unit	2.7
Cost for permits and licenses	0.6	16200/	27000
Shipping costs per unit	1.4
Break even price per unit	22.9
3- Relevant Cost
DM	Sunk cost
DL	Sunk cost
Var. Mfg. OH	Sunk cost
Var. Selling and Adm. Exp.	4.7
Minimum selling price	4.7
4 - Impact on profits				If the company operates at 25 % Level
Net operating loss at 25 %	25875			Units produced = 90000 * 2/12 = 15000 * 25 %= 3750 units
If compnay is closed down				The profit that can be earned on these units
Fixed manufacturing OH cost ( 105000 * 35 %)	36750			Contribution margin = 3750 * 39.1 = $ 146625	Answer a
Fixed Selling cost ( 67500 * 80 %)	54000			Less:- Fixed manufacturing OH = 630000 * 2/12 = 105000
Total Loss incurred by closing down the plant	90750			Fixed selling expenses = 405000 * 2/12 = 67500
Net disadvantage of closing the plant	-64875	Answer c		Net loss incurred = 25875
no, it should not close the plant		Answer d		Answer b - ( 105000 + 67500 ) - 90750 = 81750
5- relevant cost
Variable Mfg. cost per unit	18.2	( 6.5 + 8 + 3.7 )
Fixed mfg. OH cost ( 7 * 30 % )	2.1
Var. Selling and Adm. Exp. ( 4.7 * 1/3 )	1.57
Total costs avoided	21.87