Andretti Company has a single product called a Dak. The company normally produce
ID: 2510483 • 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.
3. The company has 600 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 is the unit cost figure that is relevant for setting a minimum selling price?
4. 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% during the two-month period.
a. How much total contribution margin will Andretti forgo if it closes the plant for two months?
b. How much total fixed cost will the company avoid if it closes the plant for two months?
c. What is the financial advantage (disadvantage) of closing the plant for the two-month period?
d. Should Andretti close the plant for two months?
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
3. Minimum selling price : $3.7 is the variable selling expenses as all manufacturing expenses have already been incurred hence irrelevant. 4. Computation of Income if, Operate at 25% of Normal level cost/Unit Existing Capacity Operate at 25% of Normal Level No. of units 87000 21750 Sales $58.00 $5,046,000 $1,261,500 Less: variable expenses Direct Material $8.50 $739,500 $176,375 Direct Labour $11.00 $957,000 $228,250 Variable Manufacturing Overhead $2.10 $182,700 $43,575 Variable selling expense $3.70 $321,900 $76,775 Contribution Margin $32.70 $2,844,900 $736,525 Less: Fixed expenses Fixed manufacturing overhead $348,000 $747,000 Fixed selling expenses $348,000 $488,000 Net operating Income $2,148,900 -$498,475 Revised Fixed cost if, close it Plant down Detail Existing Revised Fixed Manufacuring Overhead $348,000 $121,800 Fixed Selling Expense $348,000 $278,400 Total Fixed Cost $696,000 $400,200 a. Contribution margin of ($736525*2)=$1473050 will be forgo if plant will be shut down for 2 month b. If, plant will close for 2 month the fixed cost will be saved by company ($696000-$400200)*2 = $591600 c. Financial advantage of closing the plant for 2 month because if it will operate the plat at 25% capacity net loss will be $ 498475 permonth . However if it will cose down the plant the net loss of fixed cost will be $400200 permonth.. d. Yes Andretti Cshould close the plant for 2 month