Andretti Company has a single product called a Dak. The company normally produce

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 $44 per unit. The company's unit costs at this level of activity are given below Direct materials Direct labor Variable manufacturing overhead Fixed manufacturing overhead Variable selling expenses Fixed selling expenses 8.50 8.00 2.70 8.00 ($696,000 total) 3.70 5.50 ($478,500 total) Total cost per unit $ 36.40 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 121,800 Daks each year without any increase in fixed manufacturing overhead costs. The company could increase its sales by 40% above the present 87,000 units each year if it were willing to increase the fixed selling expenses by $140,000. Calculate the incremental net operating income. (Round all dollar amounts to 2 decimal places.) Increased sales in units Contribution margin per unit Incremental contribution margin Less added fixed selling expense Incremental net operating income 1-b. Would the increased fixed selling expenses be justified? No Yes

Explanation / Answer

1-a.

1-b. Yes

2.

3. Relevant unit cost: $3.70 per unit

The variable selling expense is the relevant cost since it is a future cost while all other costs are sunk costs.

4.

*Contribution margin lost

Two months production and sales = 87000 x 2/12 = 14500 units

Contribution margin lost = 25% x 14500 x $21.10 = $76487.50

5.

Increased sales in units (87000 x 40%) 34800 Contribution margin per unit* 21.10 Incremental contribution margin 734280 Less added fixed selling expense 140000 Incremental net operating income 594280

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