Andretti Company has a single product called a Dak. The company normally produce
ID: 2341259 • Letter: A
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 $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 $ 7.50 9.00 2.00 4.00 ($336,000 total) 3.70 3.50 ($294,000 total) Total cost per unit $29.70 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 117.600 Daks each year without any increase in fixed manufacturing overhead costs. The company could increase its sales by 40% above the present 84,000 units each year if it were willing to increase the fixed selling expenses by $120,000. Calculate the incremental net operating income. (Round all dollar amounts to 2 decimal places.) ncreased sales in units Contribution margin per unit Incremental contribution margin Less added fixed selling expense Incremental net operating income 1-b. Would the increased fixed selling expenses be justified? O Yes O No O Type here to search 0Explanation / Answer
Present sale price 46.00 Less: Variable costs Direct Materials 7.50 Direct Labor 9.00 Variable overhead 2.00 Variable selling expense 3.70 Total variable costs 22.20 Contribution Margin - per unit 23.80 Part 1-a Increased sales in units (40% of 84,000) 33600 Contribution margin - per unit 23.80 Incremental contribution margin 799680 Less: Added fixed selling expense 120000 Incremental net operating income 679680 Part 1-b Would the increased fixed selling expense be justiied Yes Part 2 Direct Materials 7.50 Direct Labor 9.00 Variable overhead 2.00 Variable Manufacturing cost - per unit 18.50 Import duties per unit 1.70 Permits and licenses - per unit 0.70 Shipping cost per unit 1.40 Breakeven price - per unit 22.30 Part 3 Relevant unit cost 3.70 Per unit Since the Variable manufacturing cost is already incurred, so it is a sunk cost. Variable selling expense is still to be incurred, hence it is a relavent cost. Part 4 Normal level of production 84000 25% of production 21000 Number of units in 2 months 42000 Contribution margin per unit 23.80 Contribution margin lost 999600 Fixed manufacturing overhead ($336,000*35%) 235200 Fixed Selling expense ($294,000*80%) 470400 705600 Net disadvantage of closing the plant 294000 Part 5 Variable Manufacturing cost 18.50 Fixed manufacturing cost (30% of present cost) 1.20 Variable selling expense (1/3 of present cost) 1.23 Total costs avoided 20.93