Andretti Company has a single product called a Dak. The company normally produce
ID: 2584417 • Letter: A
Question
Andretti Company has a single product called a Dak. The company normally produces and sells 86,000 Daks each year at a selling price of $44 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 107,500 Daks each year without any increase in fixed manufacturing overhead costs. The company could increase its unit sales by 25% above the present 86,000 units each year if it were willing to increase the fixed selling expenses by $140,000. What is the financial advantage (disadvantage) of investing an additional $140,000 in fixed selling expenses?
1-b. Would the additional investment be justified?
2. Assume again that Andretti Company has sufficient capacity to produce 107,500 Daks each year. A customer in a foreign market wants to purchase 21,500 Daks. If Andretti accepts this order it would have to pay import duties on the Daks of $3.70 per unit and an additional $15,050 for permits and licenses. The only selling costs that would be associated with the order would be $2.70 per unit shipping cost. What is the break-even price per unit on this order?
3. The company has 500 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 30% 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 86,000 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?
***It cant get any "CLEARER" than this!!! WHAT DON'T YOU UNDERSTAND?!!!?
Direct materials $ 7.50 Direct labor 12.00 Variable manufacturing overhead 3.60 Fixed manufacturing overhead 7.00 ($602,000 total) Variable selling expenses 1.70 Fixed selling expenses 5.50 ($473,000 total) Total cost per unit $ 37.30 Andretti Company has a single product called a Dak. The company normally produces and sells 86,000 Daks each year at a selling price of $44 per unit. The company's unit costs at this level of activity are given below: Direct materials Direct labor Variable manufacturing overhead Fixed manufacturing overhead Variable selling expenses Fixed selling expenses Total cost per unit 7.50 12.00 3.60 7.00 ($602, 000 total) 1.70 5.50 ($473,000 total) $ 37.30 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 107,500 Daks each year without any increase in fixed manufacturing overhead costs. The company could increase its unit sales by 25% above the present 86,000 units each year if it were willing to increase the fixed selling expenses by $140,000. what is the financial advantage (disadvantage) of investing an additional $140,000 in fixed selling expenses? 1-b. Would the additional investment be justified? 2. Assume again that Andretti Company has sufficient capacity to produce 107,500 Daks each year. A customer in a foreign market wants to purchase 21,500 Daks. If Andretti accepts this order it would have to pay import duties on the Daks of $3.70 per unit and an additional $15,050 for permits and licenses. The only selling costs that would be associated with the order would be $2.70 per unit shipping cost. What is the break-even price per unit on this order? 3. The company has 500 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 30% 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 86,000 Daks and ship them directly to Andretti's customers. If Andretti Company accepts this offer, the facilities that it uses to nroduce Daks vould be idle: however fixed mAnufacturina (verheAd csts would be reduced bv 30% Because the oltside mAnufacturer would nafnExplanation / Answer
Req 1-A: Total Variable cost per unit: Direct material per unit 7.5 Direct Labour per unit 12 Variable manufacturing overheads 3.6 Variable selling expense 1.7 Variable cost per unit 24.8 Now, With additional; investment of selling expense by $ 140,000, Sales increase by 25% Current sales level : 86,000 units per year Increase in Sales unit by 25% i.e. 21,500 units Financial Advantage for investment: Additional Sales revenue (21,500 units@ 44 per unit) 946000 Less: Variable cost (21,500 units@24.80 per unit) 533200 Contribution 412800 Less: Additional investment in Selling expense 140,000 Financial Advantage of Investment 272,800 Req 1-B. The investment is justified as it increase the net income by $ 272,800 as computed above. Req 2: Order from Foreign Buyer Variable cost per unit in case of foreign order: Direct material per unit 7.5 Direct Labour per unit 12 Variable manufacturing overheads 3.6 Import Duty per unit 3.7 Selling expense per unit 2.7 Variable cost per unit 29.5 Additonal Permits and licences cost $15,050 Total units of foreign order 21,500 units Break even price for foreign order= Variable cost per unit + Licence and Permits cost per unit $ 29.50 per unit + (15050 /21,500) per unit $ 29.50+ $ 0.70 per unit = $ 30.20 per unit Req 3: If 500 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 7.5 Direct Labour per unit 12 Variable manufacturing overheads 3.6 Variable selling expense 1.7 Variable cost per unit 24.8 Therefore, Minimum selling price should be $ 24.80 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 (86,000 /12) = 7167 units During Strike operating at 25% of current level. Therefore, Sales during Strike (7167*2 *25%)= 3584 units Contribution earned during Strike in Two month period: Sales ( 3584 units@44) 157696 Less: Variable cost (3584 units@ 24.80) 88883 Contribution earned during two month strike 68813 Req 4-A Contribution margin of $ 68,813 have to forego by Andretti if plant is closed down Req 4-B: Fixed manufacturing cost per month (602,000 /12) = $ 50167 Fixed Selling Expense per month (473,000/12) = $ 39,417 If plant closed down, Fixed manufaturing cost wil continue at 30% (i.e. 70% 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 (50167*2*70%) 70233.8 Fixed Selling expense(39417*2*20%) 15766.8 Avoided Fixed cost 86000.6 (Ifplant closes down) Req 4-C: Financial Advantage if plant closed down: Avoidable fixed cost 86000.6 Less: Contribution margin foregone 68,813 Financial Advantage of closing the plant 17,188 Req 4-D Yes. Andretti Should close the plant as it will give the financial advantage of $ 17,188