Andretti Company has a single product called a Dak. The company normally produce
ID: 2593158 • Letter: A
Question
Andretti Company has a single product called a Dak. The company normally produces and sells 89,000 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 $ 7.50 Direct labor 12.00 Variable manufacturing overhead 3.40 Fixed manufacturing overhead 3.00 ($267,000 total) Variable selling expenses 2.70 Fixed selling expenses 3.50 ($311,500 total) Total cost per unit $ 32.10 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 120,150 Daks each year without any increase in fixed manufacturing overhead costs. The company could increase its unit sales by 35% above the present 89,000 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 120,150 Daks each year. A customer in a foreign market wants to purchase 31,150 Daks. If Andretti accepts this order it would have to pay import duties on the Daks of $3.70 per unit and an additional $18,690 for permits and licenses. The only selling costs that would be associated with the order would be $1.80 per unit shipping cost. What is the break-even price per unit on this order? 3. The company has 800 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 89,000 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? Assume that Andretti Company has sufficient capacity to produce 120,150 Daks each year without any increase in fixed manufacturing overhead costs. The company could increase its unit sales by 35% above the present 89,000 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
Andretti Company Requirement 1a Daks Daks Per unit Existing 35% Increase Sales unit 89000 120150 Sales Revenue 44 3916000 5286600 Less : Direct Materials 7.5 667500 901125 Direct Labor 12 1068000 1441800 Variable Manufacturing Overhead 3.4 302600 408510 Variable selling overhead 2.7 240300 324405 Total variable cost 25.6 2278400 3075840 Contribution Margin 18.4 1637600 2210760 Fixed Manufacturing Overhead 267000 267000 Fixed selling Overhead 311500 451500 Total Fixed Cost 578500 718500 Operating Profit 1059100 1492260 There is financial advantage in investing in an additional fixed selling expenses as operating profit will increase by 433160 Requirement 1b Yes, Additional Investment is justified as there is increase in operating profit by 433160 Requirement 2 Daks Per unit Foregin Market Buyer Total Sales unit 31150 Sales Revenue 0 Less : Direct Materials 7.5 233625 Direct Labor 12 373800 Variable Manufacturing Overhead 3.4 105910 Variable selling overhead 1.8 56070 Import duty 3.7 115255 Total variable cost 28.4 884660 Contribution Margin Fixed Manufacturing Overhead Fixed selling Overhead 18690 Total Fixed Cost 18690 Operating Profit Break even price per unit for this order will be =(Total variable cost+Total fixed cost)/no. of order units =(884660+18690)/31150 29 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 7.5 Direct Labor 12 Variable Manufacturing Overhead 3.4 Total variable cost 22.9 If we can get anything above or equal to $22.9 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 3708 Sales unit for 2 months Sales Revenue 42 155736 =89000/12*2 Less : 14833.33 at normal level Direct Materials 7.5 27810 3708 at 25% of normal level Direct Labor 12 44496 Variable Manufacturing Overhead 3.4 12607.2 Variable selling overhead 2.7 10012 Total variable cost 25.6 94925 Contribution Margin 16.4 60811 Fixed Manufacturing Overhead 44500 for 2 months Fixed selling Overhead 51917 for 2 months Total Fixed Cost 96417 for 2 months Operating Profit -35605 If we continue to operate at 25% of normal capacity for next 2 months there will be operating loss of 35605.47 for 2 months a Contribution margin Andretti will have to forgo if it decides to close down plant for 2 months will 60811.2 b The total fixed cost the company would avoid are as follow Fixed Manufacturing cost for 2 months 44500 30% of above 13350 Avoidable fixed manufacturing cost A 31150 Fixed Selling cost for 2 months 96416.67 20% of above B 19283.33 So total fixed cost the Andretti would avoid A+B 50433.33 c The financial advantages of closing the plant for 2 months are Fixed cost that can be avoided 50433.33 Plus opportunity loss if it continues to operate 35605.47 Financial advantage = avoidence of above 86038.8 d Plant should be shut down for 2 month due to following calculations =Avoidable fixed cost/Contribution per unit =96417/16.4 5879 we can operate the plant if we can achieve the minimum production of 5879 units for 2 months. But, we can only achieve the minimum production of 3708 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