price of $60 per unit. The company\'s unit costs at this level of activity are g
ID: 2430551 • Letter: P
Question
price of $60 per unit. The company's unit costs at this level of activity are given below: 10.00 $150,000 in fixed selling ex t be accepts this order it would have to pay import duties on the Daks of $2.70 per unit and l $23,240 for permits and licenses. The only selling costs that would be associated with the order would be $2.10 per cost rities. y has enough material on hand to operate at 25% of normal levels for Andretti could close its plant down entirely for the two months. If the plant were closed. fixed manufa overhead costs would continue at 35% of their normal level during the would be reduced by 20% during the t period b. How much total fixed cost will the c avoid if it closes the plant for two months? nth period? Prev1 of 3 Next >Explanation / Answer
Solution 1a:
Financial advantage of investing $150,000 in additonal fixed selling expenses = $980,045.
Solution 1b:
As there is net financial advantage, therefore additional investment is justified.
Solution 2:
Breakeven price per unit = (Total variable cost + Additional fixed cost) / Nos of units to be sold in foreign market
= [29050 * ($7.50 + $10 + $1.90 + $2.70 + $2.10) + $23,240] / 29050
= $25 per unit
Solution 3:
The relevant unit cost is $1.70 (Variable selling expenses). All other variable costs are sunk,as the units have already been produced and cost already incurred. The fixed costs would not be relevant, as they will not be affected by the sale of leftover units
Solution 4:
Contribution margin per unit = $60 - $7.50 - $10 - $1.90 - $1.70 = $38.90
a. Total contribution margin will andretti forgo if it closes the plant for 2 months = Total sales for 2 months * contribution margin per unit
= (83000*2/12*25%) * $38.90 = $134,516.20
b. Total fixed costs company avoid if it closes the plant for 2 months = ($498,000 * 65%*2/12) + ($373,500 * 20%*2/12) = $66,400
c. Financial advantage (disdvantage) of closing the plant for 2 months period = $66,400 - $134,516.20 = ($68,116.20)
d. As there is net financial disadvantage on closing the plant, therefore Andretti should not close the plant for 2 months.
Solution 5:
Avoidable cost per unit = Direct material + direct labor + Variable manufacturing overhead + Avoidable variable selling expenses + (Avoidable fixed manufacturing overhead / Nos of units)
= $7.50 + $10 + $1.90 + ($1.70*2/3) + ($498000*30%/83000) = $22.33 per unit
Differential Analysis - Existing sales (alt 1)or increased sales with additional selling expenses (Alt2) - Andretti Company Particulars Existing Sale (83000 Units)(Alt 1) Increased sales with additonal selling expenses (Alt 2) (112050 units) Differential effect on income (Alt 2) Details Amount Details Amount Revenue 83000*$60 $4,980,000.00 112050*$60 $6,723,000.00 $1,743,000.00 Costs: Direct Material 83000*$7.50 $622,500.00 112050*$7.50 $840,375.00 $217,875.00 Direct Labor 83000*$10 $830,000.00 112050*$10 $1,120,500.00 $290,500.00 Variable manufacturing Overhead 83000*$1.90 $157,700.00 112050*$1.90 $212,895.00 $55,195.00 Variable Selling Expenses 83000*$1.70 $141,100.00 112050*$1.70 $190,485.00 $49,385.00 Fixed manufacturing overhead $498,000.00 $498,000.00 $0.00 Fixed Selling expenses $373,500.00 $523,500.00 $150,000.00 Income / (Loss) $2,357,200.00 $3,337,245.00 $980,045.00