Andretti Company has a single product called a Dak. The company normally produce
ID: 3216491 • Letter: A
Question
Andretti Company has a single product called a Dak. The company normally produces and sells 90,000 Daks each year at a selling price of $64 per unit. The company’s unit costs at this level of activity are given below: Direct materials $ 6.50 Direct labor 9.00 Variable manufacturing overhead 3.60 Fixed manufacturing overhead 6.00 ($540,000 total) Variable selling expenses 2.70 Fixed selling expenses 3.00 ($270,000 total) Total cost per unit $ 30.80 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 112,500 Daks each year without any increase in fixed manufacturing overhead costs. The company could increase its unit sales by 25% above the present 90,000 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 112,500 Daks each year. A customer in a foreign market wants to purchase 22,500 Daks. If Andretti accepts this order it would have to pay import duties on the Daks of $3.70 per unit and an additional $15,750 for permits and licenses. The only selling costs that would be associated with the order would be $1.90 per unit shipping cost. What is the break-even price per unit on this order? 3. The company has 400 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 90,000 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?
Explanation / Answer
Andretti Company Price/Unit Production Units Total Inflow Total Out Flow Profit Selling Price 64 90000 5760000 Direct Materials 6.5 90000 585000 Direct Labour 9 90000 810000 Variable Manufacturing Overhead 3.6 90000 324000 Fixed Manufacturing Overhead 6 90000 540000 Variable selling Expencess 2.7 90000 243000 Fixed Selling Expencess 3 90000 270000 5760000 2772000 2988000 1.a Price/Unit Production Units Total Inflow Total Out Flow Profit Selling Price 64 112500 7200000 Direct Materials 6.5 112500 731250 Direct Labour 9 112500 1012500 Variable Manufacturing Overhead 3.6 112500 405000 Fixed Manufacturing Overhead 6 112500 540000 Variable selling Expencess 2.7 112500 303750 Fixed Selling Expencess 3 112500 370000 7200000 3362500 3837500 Here financial advantage is here as profit is increasing 1b To sell more we have to spend more on fixed selling expencess 2 Total Order is 112500 Price/Unit Production Units Total Inflow Total Out Flow Profit Expencess As previous 112500 3362500 Import duty 3.7 22500 83250 Permita & licenses 15750 shipping cost 1.7 22500 38250 3499750 So selling price of 11250 =3499750 Brek even point= 31.1089 3 Fixed cost are not taken in account Price/Unit Production Units Total Inflow Total Out Flow Profit Selling Price 21.8 400 8720 Direct Materials 6.5 400 2600 Direct Labour 9 400 3600 Variable Manufacturing Overhead 3.6 400 1440 Variable selling Expencess 2.7 400 1080 8720 8720 0 So selling price must be 818720 for 400 units minimum selling price = 21.8 4a Price/Unit Production Units At Closed Situation At normal situation Diffrance Selling Price Direct Materials Direct Labour Variable Manufacturing Overhead Fixed Manufacturing Overhead 6 378000 540000 Variable selling Expencess Fixed Selling Expencess 3 216000 270000 594000 810000 216000 So it will avoid fixed cost total of 216000 per month 4b Total Fixed cost it will aviod in 2 months 432000 4c Price/Unit Production Units Total Inflow Total Out Flow Profit Selling Price 64 22500 1440000 Direct Materials 6.5 22500 146250 Direct Labour 9 22500 202500 Variable Manufacturing Overhead 3.6 22500 81000 Fixed Manufacturing Overhead 6 22500 540000 Variable selling Expencess 2.7 22500 60750 Fixed Selling Expencess 3 22500 270000 1440000 1300500 139500 If it runs the plant there is a profit of 139500 per month