Andretti Company has a single product called a Dak. The company normally produce
ID: 2403896 • 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 $40 per unit. The company’s unit costs at this level of activity are given below: Direct materials $ 9.50 Direct labor 10.00 Variable manufacturing overhead 3.20 Fixed manufacturing overhead 9.00 ($756,000 total) Variable selling expenses 3.70 Fixed selling expenses 4.50 ($378,000 total) Total cost per unit $ 39.90
4. Due to a strike in its supplier’s plant, Andretti Company is unable to purchase more material for the production of Daks. The strike is expected to last for two months. Andretti Company has enough material on hand to operate at 25% of normal levels for the two-month period. As an alternative, Andretti could close its plant down entirely for the two months. If the plant were closed, fixed manufacturing overhead costs would continue at 35% of their normal level during the two-month period and the fixed selling expenses would be reduced by 20%. What would be the impact on profits of closing the plant for the two-month period? (Any losses should be indicated by a minus sign. Round all calculations (intermediate and final) to whole numbers. Round unit calculations to whole numbers.)
Contribution Margin lost
fixed manufacturing overhead cost
Fixed selling cost
Explanation / Answer
Contribution margin selling price per unit 40 less Variable expenses direct materials 9.5 direct labor 10 Variable manufacturing overhead 3.2 variable selling expense 3.7 26.4 Contribution margin per unit 13.6 4) Contribution margin lost (3500*13.6) -47600 fixed costs fixed manufacturing overhead cost (756,000*2/12)*65% 81900 fixed selling cost (378,000*2/12)*20% 12600 94500 net advantage of closing the plant 46900 84,000*25%*2/12= 3500 units