Andretti Company has a single product called a Dak. The company normally produce
ID: 2443594 • Letter: A
Question
Andretti Company has a single product called a Dak. The company normally produces and sells 96,000 Daks each year at a selling price of $46 per unit. The company's unit costs at this level of activity are given below:Direct materials $9.20
Direct labor 10.00
Variable manufacturing overhead 2.10
Fixed manufacturing overhead 6.00 ($576,000 total)
Variable selling expenses 1.30
Fixed selling expenses 4.50 ($432,000 total)
Total cost per unit $33.10
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A number of questions relating to the production and sale of Daks follow. Each question is independent.
Requirement 1:
(a) Assume that Andretti Company has sufficient capacity to produce 115,200 Daks each year without any increase in fixed manufacturing overhead costs. The company could increase its sales by 20% above the present 96,000 units each year if it were willing to increase the fixed selling expenses by $132,000. Compute the Incremental net operating income. (Omit the "$" sign in your response.)
Incremental net operating income $
(b) Would the increased fixed selling expenses be justified?
(Click to select)YesNo
Requirement 2:
Assume again that Andretti Company has sufficient capacity to produce 115,200 Daks each year. A customer in a foreign market wants to purchase 10,000 Daks. Import duties on the Daks would be $1.50 per unit, and costs for permits and licenses would be $10,000. The only selling costs that would be associated with the order would be $2.00 per unit shipping cost. Compute the per unit break-even price on this order. (Round your answer to 2 decimal places. Omit the "$" sign in your response.)
Break-even price per unit $
Requirement 3:
The company has 500 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 unit cost figure is relevant for setting a minimum selling price? (Round your answer to 2 decimal places. Omit the "$" sign in your response.)
Relevant cost is $ per unit
Requirement 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 60% of their normal level during the two-month period and the fixed selling expenses would be reduced by 25%. What would be the impact on profits of closing the plant for the two-month period? (Input the amount as positive value. Omit the "$" sign in your response.)
Profits would (Click to select)decreaseincrease by $
Requirement 5:
An outside manufacturer has offered to produce Daks and ship them directly to Andretti's customers. If Andretti Company accepts this offer, the facilities that it uses to produce Daks would be idle; however, fixed manufacturing overhead costs would be reduced by 30%. Because the outside manufacturer would pay for all shipping costs, the variable selling expenses would be only three-fourth of their present amount. Compute the unit cost that is relevant for comparison to the price quoted by the outside manufacturer. (Round your answer to 2 decimal places. Omit the "$" sign in your response.)
Quotation must be less than $ per unit.
Explanation / Answer
Variable cost per unit of dak is as below :- Direct materials $9.20 Direct labor 10.00 Variable manufacturing overhead 2.10 Variable selling expenses 1.30 ------------------------------------------ Total Var cost pu $22.60 Total Fixed cost:- Fixed manufacturing overhead $576,000 Fixed selling expenses $432,000 ---------------------------------------- Total Fixed costs = $1,008,000 Sale price pu = $46.00 Less Var cost = $22.60 ---------------------------- Cont pu = $23.40 Total Cont for 96000 dak = 96000*$23.40 =$22,46,400 Less Fixed costs = $10,08,000 ---------------------------------- Net Op Income = $12,38,400...........................(A) Requirement 1: (a) Assume that Andretti Company has sufficient capacity to produce 115,200 Daks each year without any increase in fixed manufacturing overhead costs. If Sales increase by 20%, new sales will be 96000*1.20 = 115200 So Total Cont = 115200*Cont pu = 115,200*$23.40 = $26,95,680 Fixed costs were $10,08,000 & will increase by $132,000. SO New Fixed costs = $1140,000 SO Operating inocme = Total COnt - Fixed costs = $26,95,680-$1140,000 = $15,55,680...............(B) So Incremental net operating income = New Op Inc - Old Op Inc = B-A = 317,280..ANS (b) Would the increased fixed selling expenses be justified? Yes. As Incremental Op income is muchmore than Incremental Selling Fixed cost Requirement 2: As only selling cost is shipping cot, it means that the Import duty of 1.50 pu will be borne by customer & is not relevant here. Var cost for Dak will be : Direct materials $9.20 Direct labor 10.00 Variable manufacturing overhead 2.10 Variable selling expenses 1.30 Var SHipping cost 2.00 ---------------------------------- Export order Var cost pu = 24.60 Total Var cost for 10000 units = 10000*$24.60 = $246,000 Add Cost for Lic & permis = $10,000 -------------------------------------------- Total Cost for export order= $256,000 So pu Cost price = $256,000/10,000 = $25.60 So Break-even price per unit $ 25.60...........ANS Note : If Import duty is to be born by Seller, then pu BEP will be $25.60+$1.50 = $27.10 Requirement 3: Fixed costs will be incurred irrespective of defective daks Relevant costs will be var costs: Direct materials $9.20 Direct labor 10.00 Variable manufacturing overhead 2.10 ----------------------------------------------- Total Var cost pu = $21.30 Relevant cost is $21.30 per unit Requirement 4: We assume that all fixed expenses are incurred evenly during teh year. So 2 month Fixed Mfg OHs = $576,000*2/12= $96000 60% of 2month Fixed OH = 60%*96000 = $57,600 Similarly 2 month Selling OHs = $432,000*2/12= $72,000 75% of 2month Fixed Selling OH = 75%*72000 = $54,000 So Total Fixed OH for 2 month period = 57600+54000 = $111,600 Normal Fixed OH for 12 month = $10,08,000 (see above) So for 10 month period, Normal Fixed OHs will be = $10,08,000*10/12 = 840,000. SO Fixed OH with 2 month shutdown = Normal Fixed OH for 10m + Fixed OH for 2M = $840,000+$111,600 = $951,600 Normal level of Prodn is 96000 units SO for 10 months, production will be 96000*10/12 = 80000 units SO Total Cont for 80000 units= 80000*$23.40 (see above) = $1872,000 Less Fixed OH with 2 month shutdown = $951,600 --------------------------------------------------- Operating Inc ome for 10m = $920,400 For Normal Ops, Net Op Income = $12,38,400 as per (A) above So Profits would decrease by $1238,400-920,400 = $318,000................ANS Requirement 5: Direct materials $9.20 Direct labor 10.00 Variable manufacturing overhead 2.10 Variable selling expenses (3/4)*1.30=0.975 --------------------------------------------------- Total Var cost pu = $22.275 Total Var cost for 96000 units = 96000*$22.275 = $2138,400 Add : Fixed manufacturing overhead 0.70*$576,000=$403,200 Fixed selling expenses $432,000 ------------------------------------------- Total Cost for 96000 units = 2973,600 So pu cost = $2973,600/96000 = $30.975..rounded to $30.98 So Quotation must be less than $30.98 per unit..............ANS