Question

Andretti Company has a single product called a Dak. The company normally produces and sells 86,000 Daks each year at a selling price of $46 per unit. The company’s unit costs at this level of activity are given below:

Direct materials	$	8.50
Direct labor		10.00
Variable manufacturing overhead		3.30
Fixed manufacturing overhead		6.00	($516,000 total)
Variable selling expenses		4.70
Fixed selling expenses		5.50	($473,000 total)
Total cost per unit	$	38.00

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 116,100 Daks each year without any increase in fixed manufacturing overhead costs. The company could increase its sales by 35% above the present 86,000 units each year if it were willing to increase the fixed selling expenses by $150,000. Calculate the incremental net operating income. (Round your answers to the nearest whole number.)

1-b. Would the increased fixed selling expenses be justified?

	No
	Yes

2. Assume again that Andretti Company has sufficient capacity to produce 116,100 Daks each year. A customer in a foreign market wants to purchase 30,100 Daks. Import duties on the Daks would be $2.70 per unit, and costs for permits and licenses would be $21,070. The only selling costs that would be associated with the order would be $1.50 per unit shipping cost. Compute the per unit break-even price on this order. (Round your answers to 2 decimal places.)

3. The company has 500 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 unit cost figure is relevant for setting a minimum selling price? (Round your answer to 2 decimal places.)

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 40% of their normal level during the two-month period and the fixed selling expenses would be reduced by 20%. What would be the impact on profits of closing the plant for the two-month period? (Any losses should be indicated by a minus sign. Round all calculations (intermediate and final) to whole numbers. Round unit calculations to whole numbers.)

5. An outside manufacturer has offered to produce 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. Compute the unit cost that can be avoided if purchased from the outside manufacturer. (Do not round intermediate calculations. Round your answer to 2 decimal places.)

Answer 1

Calculation of contribution margin per Dak
Selling price	46
Less: variable costs
Direct Material	8.5
Direct Labor	10
Variable Overhead	3.3
Variable Selling Expenses	4.7
Total Variable cost	26.5
Contribution Margin per Unit	19.5
1-a Financial Advantage = Additional contribution Margin - Increased expenses
=30,100*19.5– 150,000 = $436,950
1-B yes, since benefit
2.Calculation of break even price
Direct Material	8.5
Direct Labor	10
Variable Overhead	3.3
Import Duties	2.7
Selling expenses	1.5
Total variable cost	26
Break even price = 26 + 21070/30100 = $26.7
3.Relevant cost is the variable selling expense since manufacturing cost has already been incurred i.e. $4.70 per unit
Operating level = 86,000*25%*2/12 = 3583.33 units i.e. 3,583 units
4-a. Contribution margin foregone = 3583*19.5 = $69,868.5 i.e. $69,869
4-b Fixed cost avoided = 516,000*60%*2/12 + 473,000*20%*2/12 = $67,367
c.Advantage of closing = 67,367- 69,869= $(2502) i.e. disadvantage
d.No, should not be closed
5.Calculation of avoidable cost
Direct Material	8.5
Direct Labor	10
Variable Overhead	3.3
Avoidable Fixed manufacturing overhead	1.8
Variable selling expenses avoided	1.567
Avoidable cost per unit	25.17