Andretti Company has a single product called a Dak. The company normally produce
ID: 2451929 • Letter: A
Question
Andretti Company has a single product called a Dak. The company normally produces and sells 85,000 Daks each year at a selling price of $46 per unit. The company’s unit costs at this level of activity are given below:
Assume that Andretti Company has sufficient capacity to produce 119,000 Daks each year without any increase in fixed manufacturing overhead costs. The company could increase its sales by 40% above the present 85,000 units each year if it were willing to increase the fixed selling expenses by $120,000. Calculate the incremental net operating income. (Round all dollar amounts to 2 decimal places.)
Assume again that Andretti Company has sufficient capacity to produce 119,000 Daks each year. A customer in a foreign market wants to purchase 34,000 Daks. Import duties on the Daks would be $2.70 per unit, and costs for permits and licenses would be $23,800. 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 answers to 2 decimal places.)
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 unit cost figure is relevant for setting a minimum selling price?(Round your answer to 2 decimal places.)
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 40% 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? (Enter losses/reductions with a minus sign. Round all calculations (intermediate and final) to whole numbers. Round unit calculations to whole numbers.)
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 two-thirds of their present amount. Compute the unit cost that is relevant for comparison to the price quoted by the outside manufacturer. (Do not round intermediate calculations. Round your answer to 2 decimal places.)
Andretti Company has a single product called a Dak. The company normally produces and sells 85,000 Daks each year at a selling price of $46 per unit. The company’s unit costs at this level of activity are given below:
Explanation / Answer
Part 1-a
To determine the incremental net operating income, we will have to calculate the contribution margin per unit under the current scenario. The formula for calculating contribution is given below:
Contribution = Selling Price - Total Variable Costs
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Using the information provided in the question, we get,
Contribution = 46 - (9.50 + 11+ 1.80 + 2.70) = $21 per unit
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Incremental Net Operating Income has been calculated with the use of following table:
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Part 1-b
Yes, the increase in selling expenses is justified as it is resulting in additional operating income of $594,000 for the company.
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Part 2
The formula for calculating break-even price is given below:
Break Even Price = Variable Manufacturing Cost Per Unit + Import Duties + Cost of Permits and Licenses + Shipping Cost Per Unit
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Using the information provided in the question, we get,
Break Even Price = (9.5+11+1.8) + 1.70 + 23,800/(34,000) + 2 = $26.70 [at this level, there would be no profit/loss for the company]
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Part 3
$2.70 would be the relevant cost per unit which is the value of variable selling expense. Since, the units have already been produced, costs associated with the production are not relevant (all of these will be treated as sunk costs). Fixed selling expenses will have to be incurred irrespective of the fact whether these units are sold or not.
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Part 4
We will have to calculate the loss of resulting from closure of plant. The calculation has been given below:
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Part 5
In the given case, the costs which can be avoided by purchasing from outside supplier will be treated as relevant. The calculation of total avoidable cost is given in the following table:
To accept the offer from the outside supplier, the quotation should be less than $24.10
Increase in Unit Sales (85,000*40%) 34,000 units Incremental Contribution from Increased Sales (34000*21) 714,000 Less Increase in Fixed Selling Expenses 120,000 Incremental Net Operating Income $594,000