Andretti Company has a single product called a Dak. The company normally produce
ID: 2478566 • Letter: A
Question
Andretti Company has a single product called a Dak. The company normally produces and sells 86,000 Daks each year at a selling price of $48 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. Assume that Andretti Company has sufficient capacity to produce 111,800 Daks each year without any The company has 800 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 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.)Explanation / Answer
Solution:
3. Minimum Selling price = Break even selling price
Break even selling price = Total fixed cost / Volume of production + Variable cost per unit
= 1,075,000 / 86,000 + $24.7
= $37.2
By sellin 800 Daks at this price the company will be at a no profit no loss zone
4. Changes due to strike:
Fixed manufacturing overhead cost = $688,000 * 35% = $240,800
Fixed selling exp = $387,000 - 20% = $309,600
Contribution margin for 2 month period:
Selling price $48
Less:
Direct materials $7.5
Direct labor 10
Variable manu 3.5
Variable sell exp 3.7
Total exp (24.7)
Contribution Margin 23.3
Sales in units for 2 months = 86,000 units * 2/12 = $14,335 units (approx)
Contribution margin lost (14,335* $23.3) 334,006 Fixed costs Fixed manufacturing overhead cost (240,800) Fixed selling exp (309,600) Net disadvantage of shutdown (216,395)