Andretti Company has a single product called a Dak. The company normally produce
ID: 2347712 • Letter: A
Question
Andretti Company has a single product called a Dak. The company normally produces and sells 78,000 Daks each year at a selling price of $48 per unit. The company's unit costs at this level of activity are given below:
Direct materials $8.90
Direct labor 9.00
Variable manufacturing overhead 2.10
Fixed manufacturing overhead 5.00 ($390,000 total)
Variable selling expenses 1.50
Fixed selling expenses 6.60 ($514,800 total)
Total cost per unit $33.10
Assume that Andretti Company has sufficient capacity to produce 97,500 Daks each year without any increase in fixed manufacturing overhead costs. The company could increase its sales by 25% above the present 78,000 units each year if it were willing to increase the fixed selling expenses by $126,000. Compute the Incremental net operating income.
Explanation / Answer
Old Net Operating income = 78,000 *(48-$33.10) = $1,162,200 If 97,500 units are produced fixed selling expenses = $126,000+ $514,800 = $640,800 New Net Operating income =97,500*(48-$33.10+6.6) - $640,800 = $1,455,450 Incemental Operating income = $1,455,450 - $1,162,200 = $293,250