Andretti Company has a single product called a Dak. The company normally produce
ID: 2586538 • 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 $42 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 $9.50 9.00 2.30 9.00 ($774,000 total) 2.70 6.50 ($559,000 total) $39.00 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 116,100 Daks each year without any increase in fixed manufacturing overhead costs. The company could increase its unit sales by 35% above the resent 86,000 units each year if it were willing to increase the fixed selling expenses by $120,000. What is the financial advantage (disadvantage) of investing an additional $120,000 in fixed selling expenses? 1-b. Would the additional investment be justified? 2. Assume again that Andretti Company has sufficient capacity to produce 116,100 Daks each year. A customer in a foreign marketExplanation / Answer
Andretti Company Requirement 1a Daks Daks Per unit Existing 35% Increase Sales unit 86000 116100 Sales Revenue 42 3612000 4876200 Less : Direct Materials 9.5 817000 1102950 Direct Labor 9 774000 1044900 Variable Manufacturing Overhead 2.3 197800 267030 Variable selling overhead 2.7 232200 313470 Total variable cost 23.5 2021000 2728350 Contribution Margin 18.5 1591000 2147850 Fixed Manufacturing Overhead 774000 774000 Fixed selling Overhead 559000 679000 Total Fixed Cost 1333000 1453000 Operating Profit 258000 694850 There is financial advantage in investing in an additional fixed selling expenses as operating profit will increase by 436850 Requirement 1b Yes, Additional Investment is justified as there is increase in operating profit by 436850 Requirement 2 Daks Per unit Foregin Market Buyer Total Sales unit 30100 Sales Revenue 0 Less : Direct Materials 9.5 285950 Direct Labor 9 270900 Variable Manufacturing Overhead 2.3 69230 Variable selling overhead 2.1 63210 Import duty 4.7 141470 Total variable cost 27.6 830760 Contribution Margin Fixed Manufacturing Overhead Fixed selling Overhead 24080 Total Fixed Cost 24080 Operating Profit Break even price per unit for this order will be =(Total variable cost+Total fixed cost)/no. of order units =(830760+24080)/30100 28.4 Requirement 3 The Unit Cost figure that is relevent for setting a Minimum selling price will be is the variable cost per unit Direct Materials 9.5 Direct Labor 9 Variable Manufacturing Overhead 2.3 Variable selling overhead 2.1 Import duty 4.7 Total variable cost 27.6 If we can get anything above or equal to $27.6 per unit that will be suffice. This is due to fixed overhead remaining constant. Thus only total variable cost per unit will be relevent in making the decision for 800 Daks Requirement 4 Daks Per unit for 2 months Sales unit 3583 Sales unit for 2 months Sales Revenue 42 150486 =86000/12*2 Less : 14333.33 at normal level Direct Materials 9.5 34038.5 3583 at 25% of normal level Direct Labor 9 32247 Variable Manufacturing Overhead 2.3 8240.9 Variable selling overhead 2.7 9674.1 Total variable cost 23.5 84200.5 Contribution Margin 18.5 66285.5 Fixed Manufacturing Overhead 129000 Fixed selling Overhead 93166.67 for 2 months Total Fixed Cost 222166.7 for 2 months Operating Profit -155881 If we continue to operate at 25% of normal capacity for next 2 months there will be operating loss of 155881.2 for 2 months a Contribution margin Andretti will have to forgo if it decides to close down plant for 2 months will 66285.5 b The total fixed cost the company would avoid are as follow Fixed Manufacturing cost for 2 months 129000 35% of above 45150 Avoidable fixed manufacturing cost A 83850 Fixed Selling cost for 2 months 222166.7 20% of above B 44433.33 So total fixed the Andretti would avoid A+B 128283.3 c The financial advantages of closing the plant for 2 months are Fixed cost that can be avoided 128283.3 Plus opportunity loss if it continues to operate 155881.2 Financial advantage = avoidence of above 284164.5 d Plant should be shut down for 2 month due to following calculations =Avoidable fixed cost/Contribution per unit =128283.3/18.5 6934.232 we can operate the plant if we can achieve the minimum production of 6934 units for 2 months. But, we can only achieve the minimum production of 3583 units for two months which is less than the above units. Thus plant should be shut down As per Chegg policy we can answer the maximum of four sub-parts of a question We appreciate the rating of our answers Thank You