Problem 12-18 Relevant Cost Analysis in a Variety of Situations [LO12-2, LO12-3,
ID: 2562258 • 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 87,000 Daks each year at a selling price of $48 per unit. The company’s unit costs at this level of activity are given below:
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 113,100 Daks each year without any increase in fixed manufacturing overhead costs. The company could increase its unit sales by 30% above the present 87,000 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 113,100 Daks each year. A customer in a foreign market wants to purchase 26,100 Daks. If Andretti accepts this order it would have to pay import duties on the Daks of $4.70 per unit and an additional $15,660 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 900 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 87,000 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 2.10 Fixed manufacturing overhead 8.00 ($696,000 total) Variable selling expenses 2.70 Fixed selling expenses 4.50 ($391,500 total) Total cost per unit $ 37.80Explanation / Answer
EXISTING SCENARIO--CONTRIBUTION FORMAT INCOME STATEMENT: Production and sale in units 87000 Total Per unit Sales (87000*48) $ 4,176,000 $ 48.00 Variable expenses: Direct materials $ 739,500 $ 8.50 Direct labor $ 1,044,000 $ 12.00 Variable manufacturing expenses $ 182,700 $ 2.10 Variable selling expenses $ 234,900 $ 2.70 Total variable expeses $ 2,201,100 $ 25.30 Contribution marign $ 1,974,900 $ 22.70 Fixed expenses: Manufacturing overhead $ 696,000 Selling expenses $ 391,500 Total fixed expenses $ 1,087,500 Net operating income $ 887,400 1-a) Increase in contribution margin = 26100*22.70 = $ 592,470 Less: Increase in fixed selling expenses $ 110,000 Financial advantage (increase in NOI) $ 482,470 1-b) Yes, the additional investment would be justified as the NOI will increase by $482,470.00 2) Additional fixed costs on the order $ 15,660 Contrbution margin required per unit of the order to break even = 15660/26100 = $ 0.60 Variable cost per unit = 8.5+12.0+2.1+1.4+4.7 = $ 28.70 Break even price = 0.60+28.70 = $ 29.30 3) The cost incurred on these units is a sunk cost. As such the relevant costs for setting the minumum selling price is the cost of selling the seconds. Any price above the selling cost, will increase NOI. 4) a) Contribution foregone = (87000*2/12)*25%*$22.70= $ 82,287.50 b) Total fixed costs avoided: Manufacturing fixed costs = (696000*2/12)*65% = $ 75,400.00 Fixed selling expenses = (234900*2/12)*20% = $ 7,830.00 Total fixed costs avoided $ 83,230.00 c) Financial advantage = 83230.00-82287.50 = $ 942.50 d) Yes, Andretti should close the plant for two months, as the total fixed costs saved is more than the contribution lost. 5) Variable production cost per unit (8.5+12.0+2.1) $ 22.60 Variable selling expenses avoided = 1/3rd of 2.7 = $ 0.90 Savings in fixed manufacturing costs per unit = 696000*30%/87000 = $ 2.40 Andretti’s avoidable cost per unit that it should compare to the price quoted by the outside manufacturer = 22.60+0.90+2.40 = $ 25.90