Andretti Company has a single product called a Dak. The company normally produce
ID: 2567188 • 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:
A. The company has 1,000 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 unit cost figure is relevant for setting a minimum selling price? (Round your answer to 2 decimal places.)
B.
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 30% 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 60% of their normal level during the two-month period and the fixed selling expenses would be reduced by 20%. What would be the impact on profits of closing the plant for the two-month period? (Any losses/reductions should be indicated by a minus sign.)
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:
Explanation / Answer
A. The relevant cost is $1.20, which is the variable selling cost. Because the production costs have already been incurred.
B.
impact on profits of closing the plant for the two-month period = Loss of $90000
Unit contribution margin (32 - 18) $14 Contribution los on shutting down ($14 x 60000 x 30%) -$252000 Savings in fixed cost: fixed manufacturing overhead costs ($300000 x 40%) 120000 fixed selling expenses ($210000 x 20%) 42000 Loss on shut down -$90000