Andretti Company has a single product called a Dak. The company normally produce
ID: 2510479 • Letter: A
Question
Andretti Company has a single product called a Dak. The company normally produces and sells 87,000 Daks each year at a selling price of $58 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.
Required:
1-a. Assume that Andretti Company has sufficient capacity to produce 104,400 Daks each year without any increase in fixed manufacturing overhead costs. The company could increase its unit sales by 20% above the present 87,000 units each year if it were willing to increase the fixed selling expenses by $140,000. What is the financial advantage (disadvantage) of investing an additional $140,000 in fixed selling expenses?
1-b. Would the additional investment be justified?
2. Assume again that Andretti Company has sufficient capacity to produce 104,400 Daks each year. A customer in a foreign market wants to purchase 17,400 Daks. If Andretti accepts this order it would have to pay import duties on the Daks of $3.70 per unit and an additional $10,440 for permits and licenses. The only selling costs that would be associated with the order would be $1.60 per unit shipping cost. What is the break-even price per unit on this order?
Direct materials $ 8.50 Direct labor 11.00 Variable manufacturing overhead 2.10 Fixed manufacturing overhead 4.00 ($348,000 total) Variable selling expenses 3.70 Fixed selling expenses 4.00 ($348,000 total) Total cost per unit $ 33.30Explanation / Answer
1. Computation of Net Financial Advantage at increased capacity cost/Unit Existing Capacity Increased Capacity No. of units 87000 104400 Sales (107500*50) $58.00 $5,046,000 $6,055,200 Less: variable expenses Direct Material $8.50 $739,500 $952,425 Direct Labour $11.00 $957,000 $1,232,550 Variable Manufacturing Overhead $2.10 $182,700 $235,305 Variable selling expense $3.70 $321,900 $414,585 Contribution Margin $32.70 $2,844,900 $3,220,335 Less: Fixed expenses Fixed manufacturing overhead $348,000 $348,000 Fixed selling expenses $348,000 $488,000 Net operating Income $2,148,900 $2,384,335 Net financial advantage (Disadvantage) $235,435 1(b) : yes the additional investment is justified, because due to additional investment net profit will increase by $235435 2. Computation of Breakeven price Additional Cost due to acceptance of Order Import Duties (17400*$3.70) $64,380 Permit & License $10,440 Selling Cost (17400*$1.60) $27,840 Variable cost of Goods Sold (17400*$21.60) $375,840 Total Cost for 16400 Unit $478,500 No. of Unit $17,400 Breakeven Price $28