Andreth Company has a single product called a Dak The company normaly produces a
ID: 2577683 • Letter: A
Question
Andreth Company has a single product called a Dak The company normaly produces and sells price of $32 per unit The company's unit costs at this level of a produces and sells 60.000 Daks each year at a selling Direct naterial1 Direct labor ariable manufacturing owerhead poims 5 18.60 4.50 2.30 5.80 ($383,e00 total) iked hanufacturing overhead Vargäble selling expenses Fixed selling expenses total cost per unit 3.se ($210,000 total) 26.50 number of questions relating to the production and sale of Daks follow Each question is inder Required 1a chquestion is independent. Assume that Andrett Company has suficient capacity to produce 90,000 0aks each year without any increase in fixed manufacturing overhead costs The company could willing to increase the fixed selling expenses by $80,000 What is the financial $80,000 in fixed selling expenses? 1-b. Would the additional investment be justified? increase its unit sales by 25% above the present 60,000 units each year if it were advantage (disadvantage) of investing an additional e again that Andretti Company has sufficient capacity to produce 90,000 Daks each year A customer in a wants to purchase 20,000 Daks. If Andretti accepts this order it would have to pay imp s that would be associated with the order would be $3 20 per unit shipping cost. What is the bre 3. The company has 1.000 Daks on hand that have some irregularities and are theretore c it on this order? onsidered to be seconds Due to the l be impossible to sell these units at the normal price through regudar distribution channels What is the unit figure that is relevant for setting a manimum selling pric 4 Due to a strike in its supplier's plant Andretti Compary is unable to purchase n ore material for the production of Daks The strike is Idretti Company has enough material on hand to operate at 30% of normal levels for the two-month period As an alternative. Andrett could close its plant down entirely for the two months If the plant were closed, fixed manufacturing d costs would continue at 60% of their normal level during the two-month period and the fixed selling expenses would be reduced by 20% a. How much total contribution margin wall Andrett forgo if it closes the plant for two months? b. How much total fixed cost will the company avoad if it closes the plant for two months? c. What is the financial advantage tdisadvantage) of closing the plant for the t d. Should Andretti close the plant for two months? during the two-mooth period wo-month peniod? n outside manufacturer has offered to produce 60,000 Daks and ship them directly to Andretti's customers. If Andret accepts this offer, the facilities that it uses to produce Daks would be idle, however. fixed manuf reduced by 75%. Because the outside manufacturer would pay for all sh! thirds of their manufacturer? pping costs, the vanable selling expenses would be only two- present amount What is Andrettis avoidable cost per unt that it should compare to the price quoted by the outsideExplanation / Answer
1. a
Contribution Margin and Profitability if comany increases its sales by 25% over its present sales 60,000 units
Sales after increae of 25% (60,000 + 25%) 75,000 units
Selling Price per unit = $32
Less: Total variable cost per unit
Direct Material =$10.00
Direct labour = 4.50
Variable manufacturing overhead = 2.30
Variable selling expenses = 1.20
Total variable cost = 18.00
Contribution per unit = 14.00
Total contribution for 75,000 units (75,000 x 14) = $1,050,000
Less: Total Fixed cost (300,000+290,000) 590,000
Profit 460,000
Profit at Sales of original 60,000 units
Total contribution (60,000 units x $14 per unit contribution) = $840,000
Less: Fixed cost ($ 300,000 + 210,000) = 510,000
Profit = 330,000
When sales are increased by 25% over original sales of 60,000 units and new nales are 75,000 units and increase in fixed selling overheads by $80,000 then profit increased to $460,000 from $330,000 of original profit. The advantage of increase in fixed selling overheads is increase in sales to 75,000 units which leads to increase in contribution to $1,050,000 from original contribution of $510,000. Proportionate increase in contribution is more than proportionate increase in fixed selling overheads, so increase in profits happened
1. b
Additional investment of $80,000 on fixed selliing overheads is justified as sales increased by 25% and new sales will be 75,000 units and consequently contribution per unit increased and profit also increased
2. BREAK EVEN PRICE FOR FOREIGN ORDER OF 20,000 UNITS
Break even price means the minimum income or sales price to meet the total cost and hence no profit or loss
Direct material (20,000 units x $10) = $200,000
Direct labour (20,000 x 4.50) = 90,000
Variable manufacturing overhead(20,000x2.30) = 46,000
Fixed overhead (20,000 x 5) = 100,000
Import duties (20,000 x 1.70) = 34,000
Permits and licence fees = 9,000
Selling cost (20,000 x 3.20) = 64,000
Total cost of foreign order = 543,000
Break even price per unit (290,000/20,000) = $27.15
Note: At present production of 60,000 units, fixed cost is $5 per unit and for foreign order 20,000 units @5 and remaining 40,000 units it may produce and sell in local market. Hence, fixed cost allocated among 60,000 units and for foreign order taken proportionately.