Problem 12-18 Parts 1, 3, 4) Relevant Cost Analysis in a Variety of Situations [
ID: 2436413 • Letter: P
Question
Problem 12-18 Parts 1, 3, 4) Relevant Cost Analysis in a Variety of Situations [LO12-2, LO12-3, LO12-4]
Andretti Company has a single product called a Dak. The company normally produces and sells 90,000 Daks each year at a selling price of $56 per unit. The company’s unit costs at this level of activity are given below:
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 121,500 Daks each year without any increase in fixed manufacturing overhead costs. The company could increase its unit sales by 35% above the present 90,000 units each year if it were willing to increase the fixed selling expenses by $100,000. What is the financial advantage (disadvantage) of investing an additional $100,000 in fixed selling expenses?
1-b. Would the additional investment be justified?
3. The company has 900 Daks on hand that have some irregularities and are therefore considered to be "seconds." Due to the irregularities, it will be impossible to sell these units at the normal price through regular distribution channels. What is the unit cost figure that is relevant for setting a minimum selling price?
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% during the two-month period.
a. How much total contribution margin will Andretti forgo if it closes the plant for two months?
b. How much total fixed cost will the company avoid if it closes the plant for two months?
c. What is the financial advantage (disadvantage) of closing the plant for the two-month period?
d. Should Andretti close the plant for two months?
Direct materials $ 9.50 Direct labor 10.00 Variable manufacturing overhead 2.10 Fixed manufacturing overhead 5.00 ($450,000 total) Variable selling expenses 2.70 Fixed selling expenses 4.00 ($360,000 total) Total cost per unit $ 33.30Explanation / Answer
Solution 1a:
Solution 1b:
As there is net financial advantages of $898,550, therefore additional investment is justified.
Solution 3:
The relevant unit cost is $2.70 (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 = $56 - $9.50 - $10 - $2.10 - $2.70 = $31.70
a. Total contribution margin will andretti forgo if it closes the plant for 2 months = Total sales for 2 months * contribution margin per unit
= (90000*2/12*25%) * $31.70 = $118,875
b. Total fixed costs company avoid if it closes the plant for 2 months = ($450,000 * 65%*2/12) + ($360,000 * 20%*2/12) = $60,750
c. Financial advantage (disdvantage) of closing the plant for 2 months period = $60,750 - $118,875 = ($58,125)
d. As there is net financial disadvantage on closing the plant, therefore Andretti should not close the plant for 2 months.
Differential Analysis - Existing sales (alt 1)or increased sales with additional selling expenses (Alt2) - Andretti Company Particulars Existing Sale (90000 Units)(Alt 1) Increased sales with additonal selling expenses (Alt 2) (121500 units) Differential effect on income (Alt 2) Details Amount Details Amount Revenue 90000*$56 $5,040,000.00 121500*$56 $6,804,000.00 $1,764,000.00 Costs: Direct Material 90000*$9.50 $855,000.00 121500*$9.50 $1,154,250.00 $299,250.00 Direct Labor 90000*$10 $900,000.00 121500*$10 $1,215,000.00 $315,000.00 Variable manufacturing Overhead 90000*$2.10 $189,000.00 121500*$2.10 $255,150.00 $66,150.00 Variable Selling Expenses 90000*$2.70 $243,000.00 121500*$2.70 $328,050.00 $85,050.00 Fixed manufacturing overhead $450,000.00 $450,000.00 $0.00 Fixed Selling expenses $360,000.00 $460,000.00 $100,000.00 Income / (Loss) $2,043,000.00 $2,941,550.00 $898,550.00