Question

Andretti Company has a single product called a Dak. The company normally produces and sells 60,000 Daks each year at a selling price of $32 per unit. The company’s unit costs at this level of activity are given below:

Direct materials	$	10.00
Direct labor		4.50
Variable manufacturing overhead		2.30
Fixed manufacturing overhead		5.00	($300,000 total)
Variable selling expenses		1.20
Fixed selling expenses		3.50	($210,000 total)
Total cost per unit	$	26.50

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 90,000 Daks each year without any increase in fixed manufacturing overhead costs. The company could increase its sales by 25% above the present 60,000 units each year if it were willing to increase the fixed selling expenses by $80,000. Calculate the incremental net operating income.

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

	No
	Yes

2. Assume again that Andretti Company has sufficient capacity to produce 90,000 Daks each year. A customer in a foreign market wants to purchase 20,000 Daks. Import duties on the Daks would be $1.70 per unit, and costs for permits and licenses would be $9,000. The only selling costs that would be associated with the order would be $3.20 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 1,000 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 30% 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 60% 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.)

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 75%. 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 answers to 2 decimal places.)

Answer 1

			Andretti Company
Requirement 1a
							Dak		Dak
						Per unit	Existing		25% Increase
			Sales unit				60000		75000
			Sales Revenue			32	1920000		2400000
			Less :
			Direct Materials			10	600000		750000
			Direct Labor			4.5	270000		337500
			Variable Manufacturing Overhead			2.3	138000		172500
			Variable selling overhead			1.2	72000		90000
			Total variable cost			18	1080000		1350000
			Contribution Margin			14	840000		1050000
			Fixed Manufacturing Overhead				300000		300000
			Fixed selling expenses				210000		290000
			Total Fixed Cost				510000		590000
			Operating Profit				330000		460000
								130000
			Incremental net operating Income
			There is financial advantage in investing in an additional fixed selling expenses as
			operating profit will increase by			130000
Requirement 1b
			Yes, Additional Investment is justified as there is increase in operating profit
			by	130000
Requirement 2
									Dak
						Per unit			Foregin Market Buyer
			Sales unit						20000
			Direct Materials			10			200000
			Direct Labor			4.5			90000
			Variable Manufacturing Overhead			2.3			46000
			Variable selling overhead-shipping			3.2			64000
			Import duty			1.7			34000
			Total variable cost			21.7			434000
			Fixed Manufacturing Overhead
			Permits & License costs						9000
			Total Fixed Cost						9000
			Operating Profit
			Break even price per unit for this order is
				=(Total variable cost+Total fixed cost)/no. of order units
				=(434000+9000)/20000
				22.15
Requirement 3
			The Unit Cost figure that is relevent for setting a Minimum selling price
			is the variable cost per unit
			Direct Materials			10
			Direct Labor			4.5
			Variable Manufacturing Overhead			2.3
			Variable selling overhead			1.2
			Total variable cost			18
			If we can get anything above or equal to $18 per unit that is suffice.
			This is due to fixed overhead remaining constant. Thus only total variable
			cost per unit is relevent in making the decision for 1000 Seconds Dak
Requirement 4
							Daks
						Per unit	for 2 months
			Sales unit				2500		Sales unit for 2 months
			Sales Revenue			32	80000		=60000/12*2
			Less :						10000	at normal level
			Direct Materials			10	25000		2500	at 25% of normal level
			Direct Labor			4.5	11250
			Variable Manufacturing Overhead			2.3	5750
			Variable selling overhead			1.2	3000
			Total variable cost			18	45000
			Contribution Margin			14	35000
			Fixed Manufacturing Overhead				50000		for 2 months
			Fixed selling Overhead				35000		for 2 months
			Total Fixed Cost				85000
			Operating Profit				-50000
			If we continue to operate at 25% of normal capacity for next 2 months
			there is operating loss of			50000	for 2 months
			Contribution margin Andretti will have to forgo if it decides to close down
			plant for 2 months will			35000
			The total fixed cost the company would avoid are as follow
			Fixed Manufacturing cost for 2 months						50000
			40% of above						20000
			Avoidable fixed manufacturing cost				A		30000
			Fixed Selling cost for 2 months						35000
			20% of above				B		7000
			So total fixed the Andretti would avoid				A+B		37000
			The financial advantages of closing the plant for 2 months are
			Fixed cost that can be avoided-Saving in cost						37000
			Opportunity of earning contribution margin lost -costs						35000
			Net Financial advantage						2000
			Plant should be shut down for 2 month due to following calculations
			We can see from above calculations that there is net saving of $2000
Requirement 5
			Andretti's avoidable cost per unit will be
						Per unit	Daks
			Sales unit				60000
			Direct Materials			10	600000
			Direct Labor			4.5	270000
			Variable Manufacturing Overhead			2.3	138000
			Variable selling overhead			0.4	24000
			Fixed Manufacturing Overhead				225000
			Total avoidable costs				1257000
Answer			Avoidable cost per unit				20.95
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