Check m Problem 12-18 Relevant Cost Analysis in a Variety of Situations [LO12-2,
ID: 2529411 • Letter: C
Question
Check m Problem 12-18 Relevant Cost Analysis in a Variety of Situations [LO12-2, LO12-3, LO12-4] 16 points 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 pped $ 7.50 11.80 2.88 Direct materials Direct labor Variable manufacturing overhead Fixed manufacturing overhead Variable selling expenses Fixed selling expenses Total cost per unit eBock 5.00 ($448,808 total) 3.70 Print 2.50 ($228,eee total) 32.58 References 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 g 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? 1-b. Would the additional investment be justified? me again that Andretti Company has sufficient capacity to produce 123,200 Daks each year. A customer in a foreign market f $3.70 per unit and an wants to purchase 35.200 Daks. If Andretti accepts this order it would have to pay import duties on the Daks o additional $28,160 for permits and licenses. The only selling costs that would be associate shipping cost. What is the break-even price per unit on this order? 3. The company has 900 Daks on hand that have some i irregularities, it will be impossible to sell these units at the normal price through regular distribution channels fiaure that is relevant for settina a minimum sellina price? irregularities and are therefore considered to be seconds." Due to the Prev 1of3 ??? Next > Mc Graw Hall Pat Benatar Sha .mp3Explanation / Answer
Andretti Company Requirement 1a Daks Daks Per unit Existing 35% Increase Sales unit 88000 123200 Sales Revenue 56 4928000 6899200 Less : Direct Materials 7.5 660000 924000 Direct Labor 11 968000 1355200 Variable Manufacturing Overhead 2.8 246400 344960 Variable selling overhead 3.7 325600 455840 Total variable cost 25 2200000 3080000 Contribution Margin 31 2728000 3819200 Fixed Manufacturing Overhead 440000 440000 Fixed selling expenses 220000 330000 Total Fixed Cost 660000 770000 Operating Profit 2068000 3049200 There is financial advantage in investing in an additional fixed selling expenses as operating profit will increase by 981200 Requirement 1b Yes, Additional Investment is justified as there is increase in operating profit by 981200 Requirement 2 Daks Per unit Foregin Market Buyer Total Sales unit 35200 Sales Revenue 0 Less : Direct Materials 7.5 264000 Direct Labor 11 387200 Variable Manufacturing Overhead 2.8 98560 Variable selling overhead-shipping 2.2 77440 Import duty 3.7 130240 Total variable cost 27.2 957440 Contribution Margin Fixed Manufacturing Overhead Permits & License costs 28160 Total Fixed Cost 28160 Operating Profit Break even price per unit for this order is =(Total variable cost+Total fixed cost)/no. of order units =(957440+28160)/35200 28 Requirement 3 The Unit Cost figure that is relevent for setting a Minimum selling price is the variable cost per unit Direct Materials 7.5 Direct Labor 11 Variable Manufacturing Overhead 2.8 Variable selling overhead 3.7 Total variable cost 25 If we can get anything above or equal to $25 per unit that is suffice. This is due to fixed overhead remaining constant. Thus only total variable cost per unit is relevent in making the decision for 900 Daks Requirement 4 Daks Per unit for 2 months Sales unit 3667 Sales unit for 2 months Sales Revenue 56 205333.3 =88000/12*2 Less : 14666.67 Direct Materials 7.5 27500 3667 Direct Labor 11 40333.33 Variable Manufacturing Overhead 2.8 10266.67 Variable selling overhead 3.7 13566.67 Total variable cost 25 91666.67 Contribution Margin 31 113666.7 Fixed Manufacturing Overhead 146666.7 Fixed selling Overhead 73333.33 for 2 months Total Fixed Cost 220000 for 2 months Operating Profit -106333 If we continue to operate at 25% of normal capacity for next 2 months there is operating loss of 106333.3 for 2 months a Contribution margin Andretti will have to forgo if it decides to close down plant for 2 months will 113666.7 b The total fixed cost the company would avoid are as follow Fixed Manufacturing cost for 2 months 146666.7 35% of above 51333.33 Avoidable fixed manufacturing cost A 95333.33 Fixed Selling cost for 2 months 73333.33 20% of above B 14666.67 So total fixed the Andretti would avoid A+B 110000 c The financial disadvantages of closing the plant for 2 months are Fixed cost that can be avoided-Saving in cost 110000 Opportunity of earning contribution margin lost 113666.7 Net Financial disadvantage 3666.667 d Plant should not be shut down for 2 month due to following calculations =Avoidable fixed cost/Contribution per unit =110000/31 3548.3871 we can operate the plant if we can achieve the minimum production of 3548 units for 2 months. But, we are achieving the minimum production of 3667 units for two months which is more than the above units. Thus plant should not be shut down Requirement 5 Andretti's avoidable cost per unit will be Per unit Daks Sales unit 88000 Direct Materials 7.5 660000 Direct Labor 11 968000 Variable Manufacturing Overhead 2.8 246400 Variable selling overhead 1.233333 108533.3 Fixed Manufacturing Overhead 132000 Total avoidable costs 2114933 Avoidable cost per unit 24.03333 We appreciate the rating of our answers Thank You