Andretti Company has a single product called a Dak. The company normally produce
ID: 2472210 • Letter: A
Question
Andretti Company has a single product called a Dak. The company normally produces and sells 82,000 Daks each year at a selling price of $44 per unit. The company’s unit costs at this level of activity are given below:
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%. 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.)
Contribution margin lost:
Fixed Costs:
Fixed manufacturing overhead cost:
Fixed selling
Net disadvantage of closing the plant:
Direct materials $ 8.50 Direct labor 9.00 Variable manufacturing overhead 3.70 Fixed manufacturing overhead 5.00 ($410,000 total) Variable selling expenses 2.70 Fixed selling expenses 5.50 ($451,000 total) Total cost per unit $ 34.40
Explanation / Answer
Calculation of the impact on profit if the plants are closed for 2 months Sales 82000/12 6833.333333 25% 6833 *25% 1708.25 If closed Sales 44 Direct Material 8.5 Direct Labor 9 Variable overhead 3.7 Variable Selling 5.5 Total 26.7 Contribution 17.3 Total 1708.25*17.3 29552.73 0 Fixed Manufacturing 34166.67 11958.33333 410000/12 Fixed Selling 37583.33 7516.666667 451000/12 Total Loss -42197.3 -19475 The plant should be closed as per month loss will be less