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 $40 per unit. The company’s unit costs at this level of activity are given below: Direct materials $ 9.50 Direct labor 10.00 Variable manufacturing overhead 3.20 Fixed manufacturing overhead 9.00 ($756,000 total) Variable selling expenses 3.70 Fixed selling expenses 4.50 ($378,000 total) Total cost per unit $ 39.90

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%. What would be the impact on profits of closing the plant for the two-month period? (Any losses should be indicated by a minus sign. Round all calculations (intermediate and final) to whole numbers. Round unit calculations to whole numbers.)

Contribution Margin lost

fixed manufacturing overhead cost

Fixed selling cost

Answer 1

	Contribution margin
	selling price per unit				40
	less Variable expenses
	direct materials			9.5
	direct labor			10
	Variable manufacturing overhead			3.2
	variable selling expense			3.7	26.4
	Contribution margin per unit				13.6

4)	Contribution margin lost			(3500*13.6)				-47600
	fixed costs
	fixed manufacturing overhead cost				(756,000*2/12)*65%		81900
	fixed selling cost				(378,000*2/12)*20%		12600	94500
	net advantage of closing the plant							46900
	84,000*25%*2/12=			3500	units