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 81,000 Daks each year at a selling price of $48 per unit. The company's unit costs at this level of activity are given below: Direct materials Direct labor Variable manufacturing overhead Pixed manufacturing overhead Variable selling expenses Fixed selling expenses Total cost per unit $ 7.50 10.00 3.40 4.00 ($324,000 total) 3.70 3.50 ($283,500 total) 3. 70 $32.10 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 105,300 Daks each year without any increase in fixed manufacturing overhead costs. The company could increase its unit sales by 30% 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 105,300 Daks each year. A customer in a foreign market wants to purchase 24,300 Daks. If Andretti accepts this order it would have to pay import duties on the Daks of $4.70 per unit and an additional $19,440 for permits and licenses. The only selling costs that would be associated with the order would be $1.90 per unit shipping cost. What is the break-even price per unit on this order? 3. The company 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 35% of their normal level during the two-month period and the fixed selling expenses would be reduced by 20% during the two-month period. a. How much total contribution margin will Andretti forgo if it closes the plant for two months? b. How much total fixed cost will the company avoid if it closes the plant for two months? C. What is the financial advantage (disadvantage) of closing the plant for the two-month period? d. Should Andretti close the plant for two months? has 900 Daks on hand that have some irregularities and are therefore considered to be "seconds." Due to the

Explanation / Answer

1a). Assuming total capacity of 105300 daks, currently producing 81000 daks.
Co. can increase 30% unit sales with additional fixed selling costs of $120000.
Additional units = 81000*25% = 24300 units
Selling Price                             48
Direct Material                          7.5
Direct Labour                            10
Variable mfr                              3.4
Variable selling                         3.7
Contribution per unit                  23.4
Total additional contribution = 24300*23.4 = $568620
Net Advantage = 568620 - 120000 = $448620

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                         7.5
       Direct Labour                           10
      Variable mfr overhead                3.4
      Variable selling overhead           1.9
Total Variable cost                         22.8
Additional costs:
Import duties = 24300 *4.7 = 114210
Licence                            = 19440
Total addition cost =            133650

Let the selling price be x . For breakeven this equation must be satisfied.
24300x - (24300*22.8) = 133650
24300x - 554040 = 133650
24300x = 687690
x = 28.3 i,.e breakeven selling price where profit is zero.

3). If company has 900 daks in hand which can't be sold at normal market price then , minimum relevant cost is the variable cost per unit i.e 7.5+10+3.4+3.7 = 24.6 . (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*23.4 =           78975
Fixed Costs:(324000+283500)/6 = 101250
Net loss = 78975-101250 = 22275

If company closes plant for 2 months:
Fixed Costs = Manufacturin = 324000*35% = 113400/6 = 18900
                      Selling = 283500*80% = 226800/6 = 37800
Total Fixed cost = 56700

a). Total contribution which company will forgo even closes plant for 2 months = $78975
b).Total Fixed costs if company will avoid if closed plant for 2 months:
Manufacturing = 324000/6*65% = 35100
Selling = 283500*20%/6 = 9450
Total Avoided cost = $44550
c).Financial disadvantage for closing the plant :
Loss due to closing the plant = 56700
Loss due to 25% working = 22275
Disadvantage = 56700-22275 = $34425
d).No. Company should not close the plant.

5). Avoidable cost per unit:
Variable cost per unit =   (7.5+10+3.4+(3.7/3*1))=22.13
Fixed mfr cost per unit = (324000*30%)/81000 = 1.2
Total avoidable cost per unit = 23.33 per unit

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