Problem 12-18 Relevant Cost Analysis in a Variety of Situations (L012-2, LO12-3,
ID: 2593219 • Letter: P
Question
Problem 12-18 Relevant Cost Analysis in a Variety of Situations (L012-2, LO12-3, LO12-4] 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 $42 per unit. The company's unit costs at this level of activity are given below Direct materials Direct labor Variable manufacturing overhead Pixed manufacturing overhead Variable selling expenses Fixed selling expenses Total cost per unit $ 8.50 9.00 2.30 3.00 ($255,000 total) 3.70 -1.99 ($297,500 total) 30.00 A number of questions relating to the production and sale of Daks follow. Each question is independent
Explanation / Answer
Fixed costs = 10,625 for permits and licenses
Variable costs = Direct materials + Direct labour + Variable manufacturing overhead + Variable selling expenses + Import duties
= 8.5 + 9 + 2.3 + 1.4 + 3.7
= 24.9
At break-even point Contribution margin = Fixed costs
(selling price - variable costs) * No of units = Fixed costs
(selling price - 24.9) * 21,250 = 106,250
Selling price for break-even = 29.9
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Relavent unit cost = Direct materials + Direct labour + Variable manufacturing overhead + Variable selling expenses
= 8.5 + 9 + 2.3 + 3.7
= 23.5 per unit
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No of units = 85,000 units * 25% = 21,250
Contribution margin per unit = Selling price per unit - Variable costs per unit
= 42 - (8.5 + 9 + 2.3 + 3.7)
= 18.5
Foregone contribution margin = No of units * Contribution margin per unit
= 21,250 units * 18.5 per unit
= 393,125
Total avoidable fixed costs = Fixed manufacturing overhead costs * 65% + Fixed selling expenses * 20%
= (255,000 * 65%) + (297,500 * 20%)
= 165,750 + 59,500
= 225,250
Financial disadvantage = Foregone contribution margin - Total avoidable fixed costs
= 393,125 - 225,250
= 167,875
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Variable selling expenses = 3.7 * 2/3 = 2.47
Fixed manufacturing overhead = 255,000 * 30% = 76,500
Avoidable cost per unit = (Direct materials + Direct labour + Variable manufacturing overhead + Variable selling expenses) * 85,000 units + Fixed manufacturing overhead
= (8.5 + 9 + 2.3 + 2.47) * 85,000 units + 76,500
= 1,969,450