Andretti Company has a single product called a Dak. The company normally produce
ID: 2457051 • Letter: A
Question
Andretti Company has a single product called a Dak. The company normally produces and sells 60,000 Daks each year at a selling price of $32 per unit. The company’s unit costs at this level of activity are given below: Direct materials $ 10.00 Direct labor 4.50 Variable manufacturing overhead 2.30 Fixed manufacturing overhead 5.00 ($300,000 total) Variable selling expenses 1.20 Fixed selling expenses 3.50 ($210,000 total) Total cost per unit $ 26.50
1.Assume that Andretti Company has sufficient capacity to produce 90,000 Daks each year without any increase in fixed manufacturing overhead costs. The company could increase its sales by 25% above the present 60,000 units each year if it were willing to increase the fixed selling expenses by $80,000. Calculate the incremental net operating income.
Would the increased fixed selling expenses be justified?
Assume again that Andretti Company has sufficient capacity to produce 90,000 Daks each year. A customer in a foreign market wants to purchase 20,000 Daks. Import duties on the Daks would be $1.70 per unit, and costs for permits and licenses would be $9,000. The only selling costs that would be associated with the order would be $3.20 per unit shipping cost. Compute the per unit break-even price on this order. (Round your answers to 2 decimal places.)
The company has 1,000 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.)
increased sales in units contribution margin per unit incremental contribution margin less added fixed selling expense incremental net operating incomeExplanation / Answer
1)
Selling price
32
Direct materials
10
Direct labor
4.5
Variable manufacturing overhead
2.3
Variable selling expenses
1.2
Contribution per unit
14
Increase in quantity=0.25*60000=15000
Increase in contribution=14*15000=210000
Increase in fixed cost=80000
Increase in Net Operating Income=210000-80000=$130000
3)
I believe the easiest way to price these at a discount and not have a detrimental effect on the company would be to set the price equal to the Contribution margin per item.
That being said, the contribution margin per unit is calculated as follows:
Price - Variable Costs Per Unit = Contribution Margin Per Unit, meaning that the fixed cost would be the most relevant figure for the pricing, because it would directly impact the contribution margin.
Also by pricing at this level, the company is certain to cover all fixed expenses associated with operation.
The variable costs associated with producing these products are as follows:
Direct materials $10.00
Direct labor $4.50
Variable manufacturing overhead $2.30
Variable selling expenses $1.20
which is a total variable cost per unit of $18.
To find our contribution margin per unit we take the price of 32 and subtract the variable costs, yielding a price of $32-$18 = $14 per unit
Selling price
32
Direct materials
10
Direct labor
4.5
Variable manufacturing overhead
2.3
Variable selling expenses
1.2
Contribution per unit
14