Andretti Company has a single product called a Dak. The company normally produce
ID: 2533147 • Letter: A
Question
Andretti Company has a single product called a Dak. The company normally produces and sells 81,000 Daks each year at a selling price of $60 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 Total cost per unit $ 8.50 11.00 1.80 9.00 ($729,000 total) 4.70 4.00 ($324,000 total) 39.00 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 101,250 Daks each year without any increase in fixed manufacturing overhead costs. The company could increase its unit sales by 25% above the present 81,000 units each year if it were willing to increase the fixed selling expenses by $120,000. What is the financial advantage (disadvantage) of investing an additional $120,000 in fixed selling expenses? 1-b. Would the additional investment be justified? 2. Assume again that Andretti Company has sufficient capacity to produce 101,250 Daks each year. A customer in a foreign market wants to purchase 20,250 Daks. If Andretti accepts this order it would have to pay import duties on the Daks of $4.70 per unit and an additional $10,125 for permits and licenses. The only selling costs that would be associated with the order would be $1.50 per unit shipping cost. What is the break-even price per unit on this order? 3. The company has 700 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 30% of their normal level during the two-month period and the fixed selling expenses would be reduced by 20% during the two-month periodExplanation / Answer
1a). Assuming total capacity of 101250 daks, currently producing 81000 daks.
Co. can increase 25% unit sales with additional fixed selling costs of $120000.
Additional units = 81000*25% = 20250 units
Selling Price 60
Direct Material 8.5
Direct Labour 11
Variable mfr 1.8
Variable selling 4.7
Contribution per unit 34
Total additional contribution = 20250*34 = $688500
Net Advantage = 688500 - 120000 = $568500
1b). Yes, the additional investement is justified because it results in profit.
2). Assuming company's capacity to produce daks is 101250 each year.
Calculating Total variable cost per unit for this order:
Variable Cost
Direct Material 8.5
Direct Labour 11
Variable mfr overhead 1.8
Variable selling overhead 1.5
Total Variable cost 22.8
Additional costs:
Import duties = 20250 *4.7 = 95175
Licence = 10125
Total addition cost = 105300
Let the selling price be x . For breakeven this equation must be satisfied.
20250x - (20250*22.8) = 105300
20250x - 461700 = 105300
20250x = 567000
x = 28 i,.e breakeven selling price where profit is zero.
3). If company has 700 daks in hand which can't be sold at normal market price then , minimum relevant cost is the variable cost per unit i.e 8.5+11+1.8+4.7 = 26 . (here fixed cost is not relevant because it is unavoidable and hence sunk cost)
4).IF company works at 25% capacity for 2 months i.e 81000*25% = 20250/6 = 3375 daks
Contribution = 3375*4 = 114750
Fixed Costs:(729000+324000)/6 = 175500
Net loss = 114750-175500 = 60750
If company closes plant for 2 months:
Fixed Costs = Manufacturin = 729000*30% = 218700/6 = 36450
Selling = 324000*80% = 259200/6 = 43200
Total Fixed cost = 79650
a). Total contribution which company will forgo even closes plant for 2 months = 114750
b).Total Fixed costs if company will avoid if closed plant for 2 months:
Manufacturing = 729000/6*70% = 85050
Selling = 324000*20%/6 = 10800
Total Avoided cost = 95850
c).Financial disadvantage for closing the plant :
Loss due to closing the plant = 79650
Loss due to 25% working = 60750
Disadvantage = 79650-60750 = 18900
d).No. Company should not close the plant.
5). Avoidable cost per unit:
Variable cost per unit = (8.5+11+1.8+(4.7/3*1))=22.86
Fixed mfr cost per unit = (729000*30%)/81000 = 2.7
Total avoidable cost per unit = 25.56 per unit