Problem 12-18 Relevant Cost Analysis in a Variety of Situations [LO12-2, LO12-3,
ID: 2559627 • Letter: P
Question
Problem 12-18 Relevant Cost Analysis in a Variety of Situations [LO12-2, LO12-3, LO12-4]
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 $50 per unit. The company’s unit costs at this level of activity are given below:
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 97,200 Daks each year without any increase in fixed manufacturing overhead costs. The company could increase its unit sales by 20% above the present 81,000 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?
2. Assume again that Andretti Company has sufficient capacity to produce 97,200 Daks each year. A customer in a foreign market wants to purchase 16,200 Daks. If Andretti accepts this order it would have to pay import duties on the Daks of $3.70 per unit and an additional $11,340 for permits and licenses. The only selling costs that would be associated with the order would be $1.40 per unit shipping cost. What is the break-even price per unit on this order?
3. The company has 400 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 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?
5. An outside manufacturer has offered to produce 81,000 Daks and ship them directly to Andretti’s customers. If Andretti Company accepts this offer, the facilities that it uses to produce Daks would be idle; however, fixed manufacturing overhead costs would be reduced by 30%. Because the outside manufacturer would pay for all shipping costs, the variable selling expenses would be only two-thirds of their present amount. What is Andretti’s avoidable cost per unit that it should compare to the price quoted by the outside manufacturer?
Direct materials $ 8.50 Direct labor 12.00 Variable manufacturing overhead 3.40 Fixed manufacturing overhead 8.00 ($648,000 total) Variable selling expenses 2.70 Fixed selling expenses 4.50 ($364,500 total) Total cost per unit $ 39.10Explanation / Answer
Req 1-A: Total Variable cost per unit: Direct material per unit 8.5 Direct Labour per unit 12 Variable manufacturing overheads 3.4 Variable selling expense 2.7 Variable cost per unit 26.6 Now, With additional; investment of selling expense by $ 110,000, Sales increase by 20% Current sales level : 81,000 units per year Increase in Sales unit by 20% i.e. 16200 units Financial Advantage for investment: Additional Sales revenue (16,200 units@ 50per unit) 810000 Less: Variable cost (16,200 units@26.60 per unit) 430920 Contribution 379080 Less: Additional investment in Selling expense 110,000 Financial Advantage of Investment 269,080 Req 1-B. The investment is justified as it increase the net income by $ 269,080 as computed above. Req 2: Order from Foreign Buyer Variable cost per unit in case of foreign order: Direct material per unit 8.5 Direct Labour per unit 12 Variable manufacturing overheads 3.4 Import Duty per unit 3.7 Selling expense per unit 1.4 Variable cost per unit 29 Additonal Permits and licences cost $11,340 Total units of foreign order 16,200 units Break even price for foreign order= Variable cost per unit + Licence and Permits cost per unit $ 29.00 per unit + (11,340 /16,200) per unit $ 29.00+ $ 0.70 per unit = $ 29.70 per unit Req 3: If 400 daks have some irregularities, then it must be sell off atleast at variable cost per unit. Therefore, minimum selling price for such units is variable cost per unit, whichis as follows: Direct material per unit 8.5 Direct Labour per unit 12 Variable manufacturing overheads 3.4 Variable selling expense 2.7 Variable cost per unit 26.6 Therefore, Minimum selling price should be $ 26.60 per unit Req 4: Due to Strike, the company operates at 25% of normal capacity for two months Normal sales level at current level per month (81,000 /12) = 6750 units During Strike operating at 25% of current level. Therefore, Sales during Strike (6750*2 *25%)= 3375 units Contribution earned during Strike in Two month period: Sales ( 3375 units@50) 168750 Less: Variable cost (3375 units@ 26.60) 89775 Contribution earned during two month strike 78975 Req 4-A Contribution margin of $78,975 have to forego by Andretti if plant is closed down Req 4-B: Fixed manufacturing cost per month (648,000 /12) = $ 54000 Fixed Selling Expense per month (364,500/12) = $30375 If plant closed down, Fixed manufacturing cost wil continue at 35% (i.e. 65% could be avoided) And Fixed Selling expense would be reduced by 20% (i.e. 20% could be avoided) Therefore, Total fixed cost that could be avoided during two months is as follows: Fixed Manufacturing cost (54000*2*65%) 70200 Fixed Selling expense(30375*2*20%) 12150 Avoided Fixed cost 82350 (Ifplant closes down) Req 4-C: Financial Advantage if plant closed down: Avoidable fixed cost 82350 Less: Contribution margin foregone 78,975 Financial Advantage of closing the plant 3,375 Req 4-D Yes. Andretti Should close the plant as it will give the financial advantage of $ 3375