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 $60 per unit. The company’s unit costs at this level of activity are given below:

Direct materials	$	9.50
Direct labor		10.00
Variable manufacturing overhead		3.50
Fixed manufacturing overhead		7.00	($623,000 total)
Variable selling expenses		2.70
Fixed selling expenses		4.00	($356,000 total)
Total cost per unit	$	36.70

Required:

1-a.

Assume that Andretti Company has sufficient capacity to produce 111,250 Daks each year without any increase in fixed manufacturing overhead costs. The company could increase its unit sales by 25% above the present 89,000 units each year if it were willing to increase the fixed selling expenses by $110,000. What is the financial advantage (disadvantage) of investing an additional $110,000 in fixed selling expenses?. (Round all dollar amounts to 2 decimal places.)

A number of questions relating to the production and sale of Daks follow. Each question is independent.

          

1-b.	Would the increased fixed selling expenses be justified?
	No Yes

2.

Assume again that Andretti Company has sufficient capacity to produce 111,250 Daks each year. A customer in a foreign market wants to purchase 22,250 Daks. If Andretti accepts this order it would have to pay import duties on the Daks of $3.70 per unit and an additional $17,800 for permits and licenses. The only selling costs that would be associated with the order would be $1.50 per unit shipping cost. What is the break-even price per unit 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%. 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? (Enter losses/reductions with 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 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? (Do not round intermediate calculations. Round your answer to 2 decimal places.)

  

Answer 1

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Variable cost per unit
Direct Materials	9.50	A
Direct Labor	10.00	B
Variable Manufacturing overhead	3.50	C
Variable Selling Expenses	2.70	D
Total Variable cost per unit	25.70	E=A+B+C+D
Sell Price Per unit	60.00	F
Contribution Per unit	34.30	G=F-E
Number of Units	89,000.00	H
Contribution amount	3,052,700.00	I=G*H
Fixed cost
Fixed manufacturing overhead	623,000.00	J
Fixed selling expenses	356,000.00	K
Total Fixed cost	979,000.00	L=J+K
Net Income	2,073,700.00	M=I-L
Ans 1 a
Increase in Units	22,250.00	N=H*25%
Contribution Per unit	34.30	G
Contribution Amount	763,175.00	O=N*G
Extra selling expenses	111,000.00	P
Net Income	652,175.00	Q=O-P
So the increased fixed selling expenses are because it will increase the present Net Income by $ 652,175.
Ans 2- Foreign Market
Total Variable cost per unit	25.70	E
Less: Present Variable Selling Expenses	2.70	D
Add: Shipping costs	1.50
Add: Import Duties	3.70
Revised Variable cost per unit	28.20	R
Additional permits and licenses	17,800.00	S
Number of units	22,250.00	N
Permits and licenses cost per unit	0.80	T=S/N
Break-even price per unit	29.00	U=R+T
Ans 3- Seconds Units
Only Variable unit cost figure is relevant for setting a minimum selling price.
Total Variable cost per unit of $ 25.70 is the relevant minimum selling price.
Ans 4	Plant close
Number of units	14,833.33	V=H/12*2
Contribution Per unit	34.30	G
Contribution lost	508,783.33	W=U*G
Savings in Fixed manufacturing overhead by 60%	(62,300.00)	X=J/12*2*60%
Savings in Fixed selling expenses by 20%	(11,866.67)	Y=K/12*2*20%
Net Financial disadvantage of closing the plant	434,616.67	Z=W+X+Y
Ans 4	25% capacity
Number of units	3,708.33	AA=H/12*2*25%
Contribution Per unit	34.30	G
Contribution earned	127,195.83	AB=AA*G
Fixed manufacturing overhead	103,833.33	AC=J/12*2
Fixed selling expenses	59,333.33	AD=K/12*2
Net Financial disadvantage at 25% capacity	35,970.83	AE=AB-AC-AD
So Andretti should not close the plant for two months.
Ans 5
Variable cost per unit
Direct Materials	9.50	A
Direct Labor	10.00	B
Variable Manufacturing overhead	3.50	C
Variable Selling Expenses	1.80	AF=D*2/3
Total Variable cost per unit	24.80	AG=A+B+C+AF
Fixed cost
Avoidable Fixed manufacturing overhead by 30%	(186,900.00)	AH=J*30%
Number of Units	89,000.00	H
Avoidable Fixed manufacturing overhead per unit	(2.10)	AI=AH/H
Avoidable cost per unit	22.70	AJ=AG+AI