Che Problem 12-18 Relevant Cost Analysis in a Variety of Situations [L012-2, LO1
ID: 2529345 • Letter: C
Question
Che Problem 12-18 Relevant Cost Analysis in a Variety of Situations [L012-2, LO12-3, LO12-4] Andretti Company has a single product called a Dak. The company normally produces and sells 88,000 Daks each year at a selling price of $56 per unit. The company's unit costs at this level of activity are given below: points Direct materials Direct labor Variable manufacturing overhead Fixed manufacturing overhead Variable selling expense:s Fixed selling expenses Total cost per unit $ 7.5e eBook 11.e0 2.8e 5.00 ($440,800 total) 3.70 2.50 ($220,e00 total) Print 32.50 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 123,200 Daks each year without any increase in fixed manufacturing overhead costs. The company could increase its unit sales by 40% above the present 88,000 units each year if it were willing to increase the fixed selling expenses by $110,000. What is the financial advantage (disadvantage) of investing an additional $110,000 in fixed selling expenses? Would the additional investment be justified? 2. Assume again that Andretti Company has sufficient capacity to produce 123.200 Daks each year. A customer in a foreign market wants to purchase 35,200 Daks. If Andretti accepts this order it would have to pay import duties on the Daks of $3.70 per unit and an additional $28,160 for permits and licenses. The only selling costs that would be associated with the order would be $2.20 per unit shipping cost. What is the break-even price per unit on this order? 3. The company has 900 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 fiaure that is relevant for settina a minimum sellina price? Prev Pat Benatar-Sha...mp3Explanation / Answer
1.a
Contribution margin per unit=sales per unit - variable costs
=$56-($7.50+$11×$2.80+$3.70)
=$31 per unit
Increased sales in units(88000×40%)=35,200 units
Contribution margin per unit=$31
Incremental contribution margin (35200×$31)=$1,091,200
Less added fixed selling expense=$110,000
Incremental net operating income=$981,200
1.b.
Yes . It is justifiable as it increase the company net operating income.
2.
Variable manufacturing cost per unit :($7.50+$11+$2.80)=$21.30
Variable manufacturing cost per unit=$21.30
Import duties per unit=$3.70
Permits and licences per unit(28,160/35200 units)=$0.80
Shipping cost per unit=$2.20
Break even price per unit=$28
3.
The relevant cost is $3.70 per unit, which is variable selling expense per Dak. Because the irregular u it's have already been produced. All production costs including variable production costs are sunk costs. The fixed selling expense are not relevant because they will be incurred whether or not the irregular units are sold.