Problem 12-18 Relevant Cost Analysis in a Veriety of Situations [LO12-2, LO12-3,
ID: 2554260 • Letter: P
Question
Problem 12-18 Relevant Cost Analysis in a Veriety of Situations [LO12-2, LO12-3, LO12-4] Andretti Company has a single product called a Dak. The company normally produces and sells 85,000 Daks each year at a sell price of $58 per unit. The company's unit costs at this level of activity are given below Direct materials Direct labor Variable manufacturing overhead 11.88 1.96 .70 40.60 10.00 (5850,090 total) Variable selling expenses Fixed selling expenses Total cost per unit 4.50 (3382,589 total) 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 capecity to produce 102,000 Daks each year without any increase in fixed manufacturing overhead costs. The company could increase its unit sales by 20% above the present 85,000 units each year if it willing to increase the fixed selling expenses by S110,000 What is the financial advantage (disadvantage) of investing an additiona $110,000 in fixed selling expenses? 1-b. Would the additional investment be justified? 2 Assume again that Andretti Company has sufficient capacity to produce 102,000 Daks each year. A customer in a foreign marke wants to purchase 17,000 Daks. If Andretti accepts this order it would have to pay import duties on the Daks of $270 per unit and edditional $13,600 for permits and licenses. The only selling costs that would be associated with the order would be $2.40 per un shipping cost What is the break-even price per unit on this order? 3. The company has 800 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 suppliers piant Andretti Company is unable to purchase more material for the production of Daks. The stri exnected to last for twn months Andretti Comnanv has eneunh material on hand to nnernte at 25k nf normal levels for the rwn-m 1 of 3 Next > search TOSHIBA 8 9 0Explanation / Answer
1-a. Contribution margin per unit = Selling price per unit - Variable expenses per unit = $ 58.00 - $ 26.10 = $ 31.90
Financial advantage of investing an additional $ 110,000 in fixed selling expenses = 17,000 x $ 31.90 - $ 110,000 = $ 432,300
1-b. Yes, the additional investment would be justified.
2. Break-even price per unit of the special order: $ 28.30
Cost per unit = $ 28.30
3. Only future costs can be relevant. Therefore, the unit cost relevant for setting a selling price for the defective stock is the variable unit selling price of $ 3.70. The manufacturing cost incurred on the 800 Daks is a sunk cost, and hence not relevant.
5. Avoidable cost per unit : $ 26.63
$ Direct Materials ( 17,000 x $ 9.50) 161,500 Direct Labor ( 17,000 x $ 11) 187,000 Variable Manufacturing Overhead ( 17,000 x $ 1.90) 32,300 Import Duties ( 17,000 x $ 2.70) 45,900 Shipping Cost ( 17,000 x $ 2.40) 40,800 Permits and Licenses 13,600 Total Costs $ 481,100