Question

Andretti Company has a single product called a Dak. The company normally produces and sells 108,000 Daks each year at a selling price of $80 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 $24.50 19.00 16.80 5.00 6.00 3.50 $540,000 total $378,000 total Total cost per unit $74.80 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 200,000 Daks every year without any increase in fixed manufacturing overhead costs. The company could increase its sales by 25% above the present 108,000 units each year if it were willing to increase the fixed selling expenses by $35,000. a. Calculate the incremental net operating income. (Do not round intermediate calculations.) Incremental net operating income b. Would the increased fixed expenses be justified? Yes Ο Νο 2. Assume again that Andretti Company has sufficient capacity to produce 200,000 Daks every year. A customer in a foreign market wants to purchase 36,000 Daks. Import duties on the Daks would be $4.90 per unit, and costs for permits and licences would be $16,200. The only selling costs that would be associated with the order would be $8.00 per unit shipping cost. Compute the per-unit break-even price on this order. (Do not round intermediate calculations. Round your answer to 2 decimal places.) Break-even price per unit 3. The company has 2,600 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 unit cost figure is relevant for setting a minimum selling price? (Round your answer to 2 decimal places.) Relevant unit cost

Answer 1

	Contribution margin
	selling price per unit				80
	less Variable expenses
	direct materials			24.5
	direct labor			19
	Variable manufacturing overhead			16.8
	variable selling expense			6	66.3
	Contribution margin per unit				13.7
Req 1A	increased sales in units			(108000*25%)		27000
	contribution margin per unit					13.7
	incremental contribution margin					369900
	less added fixed selling expense					35,000
	incremental net operarting income					334,900
1-b)	Yes
Req 2	Break even price per unit
	Variable manufacturing cost per unit			60.3
	Shipping cost			8
	import duties			4.9
	permits &licences			0.45
	Break even price per unit			73.65	answer
Req 3	Relevant unit cost		$6.00	per unit
4)	Foregone contribution margin			(5400*13.7)				73980.00
	total avoidable fixed cost
	fixed manufacturing overhead cost				(540000*2/12)*40%		36000
	fixed selling cost				(378000*2/12)*20%		12600	48600.00
	Financial disadvantage							-25380.00
	108000*2/12*30%=			5400	units
	No
5)	Variable manfuacturing costs						60.3
	fixed manufacturing overhead cost				(5.0*75%)=		3.75
	variable selling expense				6.0*1/3		2.00
	total costs avoided						66.05