Andretti Company has a single product called a Dak. The company normally produce
ID: 2580694 • Letter: A
Question
Andretti Company has a single product called a Dak. The company normally produces and sells 84,000 Daks each year at a selling price of $42 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 113,400 Daks each year without any increase in fixed manufacturing overhead costs. The company could increase its unit sales by 35% above the present 84,000 units each year if it were willing to increase the fixed selling expenses by $130,000. What is the financial advantage (disadvantage) of investing an additional $130,000 in fixed selling expenses?
1-b. Would the additional investment be justified?
2. Assume again that Andretti Company has sufficient capacity to produce 113,400 Daks each year. A customer in a foreign market wants to purchase 29,400 Daks. If Andretti accepts this order it would have to pay import duties on the Daks of $3.70 per unit and an additional $20,580 for permits and licenses. The only selling costs that would be associated with the order would be $2.30 per unit shipping cost. What is the break-even price per unit on this order?
3. The company has 700 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 84,000 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 $ 7.50 Direct labor 10.00 Variable manufacturing overhead 2.90 Fixed manufacturing overhead 8.00 ($672,000 total) Variable selling expenses 2.70 Fixed selling expenses 5.50 ($462,000 total) Total cost per unit $ 36.60Explanation / Answer
Total variable costs are as follows:
Total fixed expenses:
Selling price=$42.
Contribution =Sellling price - Total variable cost
=$42-$23.10
=$18.90
Answer for question no.1.a:
Increase in sales=35%*84,000
=29,400.units.
Additional contribution earned=29,400*$18.90
=$555,660.
Increase in fixed selling expenses =$130,000.
Incremental benefit =$555,660-$130,000
=$425,660.
Answer for question no.1.b:
The additional investment is justified as the investment is generating an additional operating income of $425,660.
Answer for question no.2:
Revised variable costs are as follows:
Additional fixed costs =$20,580.
Fixed costs to be recovered per unit=$20,580/29,400 Daks
=$0.70.
So, break even price for this order=Variable cost+Fixed cost
=$26.40+$0.70
=$27.10.
Answer for question no.3:
The unit cost figure that is relavant for selling the units as seconds is nohting but the variable cost i.e., $23.10
Answer for question no.4.a:
Assuming that production and costs are evenly distributed over the year.
Total production for two months=(84,000/12)*2
=14,000 units.
25% of normal level of production =25% *14,000 units
=3,500 units.
Contribution lost if the plant is closed for 2 months =3,500*18.9
=$66,150.
Answer for question no.4.b:
Fixed manufacturing expenses that would be avoided =$672,000/12*2*(100%-35%)
=$72,800.-----(1)
Fixed Selling expense for the two month period =($462,000./12)*2
=$77000
Selling expenses that would be avoided=$77000*20%=$15,400-----(2)
Fixed costs that would be avoided if the plant is closed=(1)+(2)
=$88,200.
Answer for question no.4.c:
Financial advantage of closing the plant = Aviodable fixed costs - Contribution lost if the plant is closed.
=$82,200-$66,150.
=$22,050
Anwer for question no.4.d:
The net advantage of closing the plant is more. Hence it is advisable to close the plant for two months.
Particulars Amount Direct materials 7.5 Direct labour 10 Variable manufacturing overhead 2.9 Variable selling expenses 2.7 Total variable costs 23.1