Andretti Company has a single product called a Dak. The company normally produce
ID: 2533188 • Letter: A
Question
Andretti Company has a single product called a Dak. The company normally produces and sells 60,000 Daks each year at a selling price of $32 per unit. The company’s unit costs at this level of activity are given below:
Direct materials
$
10.00
Direct labor
4.50
Variable manufacturing overhead
2.30
Fixed manufacturing overhead
5.00
($300,000 total)
Variable selling expenses
1.20
Fixed selling expenses
3.50
($210,000 total)
Total cost per unit
$
26.50
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 90,000 Daks each year without any increase in fixed manufacturing overhead costs. The company could increase its sales by 25% above the present 60,000 units each year if it were willing to increase the fixed selling expenses by $80,000. Calculate the incremental net operating income.
Increased sales in units
Contribution margin per unit
Incremental contribution margin
Less added fixed selling expense
Incremental net operating income
$0
1-b. Would the increased fixed selling expenses be justified?
Yes
No
Direct materials
$
10.00
Direct labor
4.50
Variable manufacturing overhead
2.30
Fixed manufacturing overhead
5.00
($300,000 total)
Variable selling expenses
1.20
Fixed selling expenses
3.50
($210,000 total)
Total cost per unit
$
26.50
Explanation / Answer
Increased sales in units 15000 =60000*25% Contribution margin per unit 14 =32-10-4.5-2.3-1.2 Incremental contribution margin 210000 Less added fixed selling expense 80000 Incremental net operating income 130000 1b Yes