Andretti Company (16th Edition) Andretti Company has a single product called a D
ID: 2341085 • Letter: A
Question
Andretti Company (16th Edition)
Andretti Company has a single product called a Dak. The company normally produces and sells 88,000 Daks each year at a selling price of $46 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 $ 8.50 9.00 2.80 5.00 ($440,eee total) 3.70 6.50 ($572,000 total) 35.50 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 110,000 Daks each year without any increase in fixed manufacturing overhead costs. The company could increase its unit sales by 25% above the present 88,000 units each year if it were willing to increase the fixed selling expenses by $140,000. What is the financial advantage (disadvantage) of investing an additional $140,000 in fixed selling expenses? 1-b. Would the additional investment be justified? 2. Assume again that Andretti Company has sufficient capacity to produce 110,000 Daks each year. A customer in a foreign market wants to purchase 22,000 Daks. If Andretti accepts this order it would have to pay import duties on the Daks of $2.70 per unit and an additional $15,400 for permits and licenses. The only selling costs that would be associated with the order would be $1.30 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 theExplanation / Answer
Andretti Company Requirement 1a Dak Dak Per unit Existing 25% Increase Sales unit 88000 110000 Sales Revenue 46 4048000 5060000 Less : Direct Materials 8.5 748000 935000 Direct Labor 9 792000 990000 Variable Manufacturing Overhead 2.8 246400 308000 Variable selling overhead 3.7 325600 407000 Total variable cost 24 2112000 2640000 Contribution Margin 22 1936000 2420000 Fixed Manufacturing Overhead 440000 440000 Fixed selling expenses 572000 712000 Total Fixed Cost 1012000 1152000 Operating Profit 924000 1268000 There is financial advantage in investing in an additional fixed selling expenses as operating profit will increase by 344000 Requirement 1b Yes, Additional Investment is justified as there is increase in operating profit by 344000 Requirement 2 Dak Per unit Foregin Market Buyer Sales unit 22000 Sales Revenue Less : Direct Materials 8.5 187000 Direct Labor 9 198000 Variable Manufacturing Overhead 2.8 61600 Variable selling overhead-shipping 1.2 26400 Import duty 2.7 59400 Total variable cost 24.2 532400 Contribution Margin Fixed Manufacturing Overhead Permits & License costs 15400 Total Fixed Cost 15400 Operating Profit Break even price per unit for this order is =(Total variable cost+Total fixed cost)/no. of order units =(532400+15400)/22000 24.9 Requirement 3 The Unit Cost figure that is relevent for setting a Minimum selling price is the variable cost per unit Direct Materials 8.5 Direct Labor 9 Variable Manufacturing Overhead 2.8 Variable selling overhead 3.7 Total variable cost 24 If we can get anything above or equal to $24 per unit that is suffice. This is due to fixed overhead remaining constant. Thus only total variable cost per unit is relevent in making the decision for 500 Dak Requirement 4 Wims Per unit for 2 months Sales unit 3667 Sales unit for 2 months Sales Revenue 46 168666.667 =88000/12*2 Less : 14666.66667 at normal level Direct Materials 8.5 31166.6667 3667 at 25% of normal level Direct Labor 9 33000 Variable Manufacturing Overhead 2.8 10266.6667 Variable selling overhead 3.7 13566.6667 Total variable cost 24 88000 Contribution Margin 22 80666.6667 Fixed Manufacturing Overhead 146666.667 for 2 months Fixed selling Overhead 190666.667 for 2 months Total Fixed Cost 337333.333 Operating Profit -256666.667 If we continue to operate at 25% of normal capacity for next 2 months there is operating loss of 256666.667 for 2 months a Contribution margin Andretti will have to forgo if it decides to close down plant for 2 months will 80666.6667 b The total fixed cost the company would avoid are as follow Fixed Manufacturing cost for 2 months 146666.6667 30% of above 44000 Avoidable fixed manufacturing cost A 102666.6667 Fixed Selling cost for 2 months 190666.6667 20% of above B 38133.33333 So total fixed the Andretti would avoid A+B 140800 c The financial advantages of closing the plant for 2 months are Fixed cost that can be avoided-Saving in cost 140800 Opportunity of earning contribution margin lost 80666.66667 Net Financial advantage 60133.33333 d Plant should be shut down for 2 month due to following calculations =Avoidable fixed cost/Contribution per unit =140800/22 6400 we can operate the plant if we can achieve the minimum production of 6400 units for 2 months. But, we are achieving the minimum production of 3667 for two months which is less than the above units. Thus plant should be shut down Requirement 5 Andretti's avoidable cost per unit will be Per unit Wims Sales unit 88000 Direct Materials 8.5 748000 Direct Labor 9 792000 Variable Manufacturing Overhead 2.8 246400 Variable selling overhead 1.23333333 108533.333 Fixed Manufacturing Overhead 132000 Total avoidable costs 2026933.33 Answer Avoidable cost per unit 23.0333333 We appreciate the rating of our answers Thank You