Andretti Company has a single product called a Dak. The company normally produce
ID: 2390714 • Letter: A
Question
Andretti Company has a single product called a Dak. The company normally produces and sells 81,000 Daks each year at a selling price of $46 per unit. The company's unit costs at this level of activity are given below $ 7.50 10.00 3.50 Direct materials Direct labor Variable manufacturing overhead Fixed manufacturing overhead Variable selling expenses Fixed selling expenses 10.00 (810,000 total) 2.70 5.50 ($445,500 total) Total cost per unit s 39.20 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 suficient capacity to produce 109,350 Daks each year without any increase in fixed manufacturing overhead costs. The company could increase its sales by 35% above the present 81,000 units each year if it were wiling to increase the fixed selling expenses by $140000 Calculate the incremental net operating income. (Round all dollar amounts to 2 decimal places.) Increased sales in units Contribution margin per uni Incremental contribution margin Less added fixed selling expense Incremental net operating income $0.00 1-b. Would the increased fixed selling expenses be justified? No YesExplanation / Answer
Contribution margin selling price per unit 46 less Variable expenses direct materials 7.5 direct labor 10 Variable manufacturing overhead 3.5 variable selling expense 2.7 23.7 Contribution margin per unit 22.3 Req 1A increased sales in units (81000*35%) 28350 contribution margin per unit 22.3 incremental contribution margin 632205 less added fixed selling expense 140,000 incremental net operarting income 492,205 1-b) Yes Req 2 Break even price per unit Variable manufacturing cost per unit 21 (DM+DL+VOH) Shipping cost 2 import duties 2.7 permits &licences 0.5 Break even price per unit 26.2 answer Req 3 Relevant unit cost $2.70 per unit (only selling expense will be incurred to sell irregualr units, rest is sunk cost) 4) Contribution margin lost (3375*22.3) -75263 fixed costs fixed manufacturing overhead cost (810000*2/12)*65% 87750 fixed selling cost (445,500*2/12)*20% 14850 102600 net advantage of closing the plant 27338 81,000*25%*2/12= 3375 units 5) Variable manfuacturing costs 21 fixed manufacturing overhead cost (10*30%)= 3 variable selling expense 2.7*1/3 0.90 total costs avoided 24.90