Andretti Company has a single product called a Dak. The company normally produce
ID: 2600080 • Letter: A
Question
Andretti Company has a single product called a Dak. The company normally produces and sells 81,000 Daks each year at a selling price of $46 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 101,250 Daks each year without any increase in fixed manufacturing overhead costs. The company could increase its unit sales by 25% above the present 81,000 units each year if it were willing to increase the fixed selling expenses by $100,000. What is the financial advantage (disadvantage) of investing an additional $100,000 in fixed selling expenses?
1-b. Would the additional investment be justified?
2. Assume again that Andretti Company has sufficient capacity to produce 101,250 Daks each year. A customer in a foreign market wants to purchase 20,250 Daks. If Andretti accepts this order it would have to pay import duties on the Daks of $4.70 per unit and an additional $10,125 for permits and licenses. The only selling costs that would be associated with the order would be $2.10 per unit shipping cost. What is the break-even price per unit on this order?
3. The company has 600 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 35% 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 81,000 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?
Direct materials $ 7.50 Direct labor 10.00 Variable manufacturing overhead 2.60 Fixed manufacturing overhead 4.00 ($324,000 total) Variable selling expenses 1.70 Fixed selling expenses 4.50 ($364,500 total) Total cost per unit $ 30.30 Complete this question by entering your answers in the tabs below Req 1A Req 1B Req 2 Req 3Req 4A to 4C Req 4D Req 5 Assume that Andretti Company has sufficient capacity to produce 101,250 Daks each year without any increase in fixed manufacturing overhead costs. The company could increase its unit sales by 25% above the present 81,000 units each year if it were willing to increase the fixed selling expenses by $100,000. What is the financial advantage (disadvantage) of investing an additional $100,000 in fixed selling expenses? Show less A Financial advantage Req 1A Req 1BExplanation / Answer
1 Selling price per unit $ 46.00 Variable expenses per unit 21.80 Contribution margin per unit $ 24.20 *$7.50 + $10.00 + $2.60 + $1.70 = $21.80 Increased sales in units (81,000 units x 25%) 20,250 Contribution margin per unit X $24.20 Incremental contribution margin $ 490,050 Less added fixed selling expenses $ 100,000 Incremental net operating income $ 390,050 Yes, the increase in fixed selling expenses would be justified. 2 Variable manufacturing cost per unit $20.80* Import duties per unit $ 4.70 Permits and licenses ($10,125 + 20,250 units) $ 0.50 Shipping cost per unit $ 2.10 Break-even price per unit $ 28.10 *$7.50 + $10.00 + $2.60 = $20.10. 3 The relevant cost is $1.70 per unit, which is the variable selling expense per Dak. Because the irregular units have already been produced, all production costs (including the variable production costs) are sunk. The fixed selling expenses are not relevant because they will be incurred whether or not the irregular units are sold. Depending on how the irregular units are sold, the variable expense of $1.70 per unit may not even be relevant. For example, the units may be disposed of through a liquidator without incurring the normal variable selling expense. 4 If the plant operates at 25% of normal levels, then only 3,375 units will be produced and sold during the two-month period: 81,000 units per year x 2/12 = 13,500 units. 13,500 units x 25% = 3,375 units produced and sold. Given this information, the simplest approach to the solution is: Contribution margin lost if the plant is closed (3,375 units x $24.20 per unit*) $ 81,675 Fixed costs that can be avoided if the plant is closed: Fixed manufacturing overhead cost ($324,000 x 2/12 = $54,000; $54,000 x 65%) $ 35,100 Fixed selling cost ($364,500 x 2/12 = $60,750; $60,750 x 20%) 12,150 47,250 Net disadvantage of closing the plant 34,425 *$46.00 - ($7.50 + $10.00 + $2.60 + $1.70) = $24.20 No, plant should not be closed. 5 The relevant costs are those that can be avoided by purchasing from the outside manufacturer. These costs are: Variable manufacturing costs 20.8 Fixed manufacturing overhead cost ($324,000 x 30% = $97,200; $97,200 ÷ 81,000 units) 1.2 Variable selling expense ($1.70 x 1/3) 0.57 Total costs avoided 22.57 To be acceptable, the outside manufacturer's quotation must be less than $22.57 per unit.