Andretti Company has a single product called a Dak. The company normally produce
ID: 2591304 • Letter: A
Question
Andretti Company has a single product called a Dak. The company normally produces and sells 85,000 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 3.80 6.00 ($510,000 total) 1.70 3.50 ($297,500 total) $31.50 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 114,750 Daks each year without any increase in fixed manufacturing overhead costs. The company could increase its unit sales by 35% above the present 85,000 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?Explanation / Answer
Financial Advantage = $1577000 - $1062500 = $514500
Calculation of Financial Advantage: Particulars Present Proposed Sales 44*85000 3740000 44*114750 5049000 Less: Variable Costs Direct Material 7.5*85000 637500 7.5*114750 860625 Direct Labor 9*85000 765000 9*114750 1032750 Manufacturing Overhead 3.8*85000 323000 3.8*114750 436050 Selling Expenses 1.7*85000 144500 1.7*114750 195075 1870000 2524500 Contribution Margin 1870000 2524500 Less: Fixed Ccosts Manufacturing Overhead 510000 510000 Selling Expenses 297500 297500+140000 437500 807500 947500 Net Profit 1062500 1577000