Question

Andretti Company has a single product called a Dak. The company normally produces and sells 82,000 Daks each year at a selling price of $48 per unit. The company’s unit costs at this level of activity are given below:

Direct materials	$	9.50
Direct labor		9.00
Variable manufacturing overhead		2.80
Fixed manufacturing overhead		6.00	($492,000 total)
Variable selling expenses		2.70
Fixed selling expenses		3.50	($287,000 total)
Total cost per unit	$	33.50

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 98,400 Daks each year without any increase in fixed manufacturing overhead costs. The company could increase its sales by 20% above the present 82,000 units each year if it were willing to increase the fixed selling expenses by $120,000. Calculate the incremental net operating income. (Round your answers to the nearest whole number.)

increased sales in units	$ ?
Contribution Margin (CM)	?
Incremental CM	?
less added fixed selling expense	?
Incremental net operating income	?

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

	Yes
	No

2. Assume again that Andretti Company has sufficient capacity to produce 98,400 Daks each year. A customer in a foreign market wants to purchase 16,400 Daks. Import duties on the Daks would be $1.70 per unit, and costs for permits and licenses would be $9,840. The only selling costs that would be associated with the order would be $1.60 per unit shipping cost. Compute the per unit break-even price on this order. (Round your answers to 2 decimal places.)

Variable manufacturing cost per unit	?
Import duties per unit	?
permits and licenses	?
Shipping cost per unit	?
Break-even price per unit	?

3. The company has 900 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.)

Relevant cost per unit= $ ? Per unit

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%. 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.)

Contribution margin lost		$ ?
Fixed Cost
Fixed manufacturing overhead cost	$?
Fixed Selling cost	$?	$ ?
Net advantage (disadvantage) of closing the plant		$ ?

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.)

Variable manufacturing costs	$ ?
Fixed Manufacturing overhead cost	$?
Variable selling expenses	$?
Total costs avoided	$?

Answer 1

Calculation of contribution margin:

Selling price per Dak	48
Direct Material	9.5
Direct Labor	9
Variable manufacturing overhead	2.80
Variable selling expense	2.70
Contribution Margin per Unit	$24

increased sales in units	16,400
Contribution Margin (CM)	24
Incremental CM	393,600
less added fixed selling expense	120,000
Incremental net operating income	273,600

1-b. Yes, since there is net benefit

2Break even price

Direct Material	9.5
Direct Labor	9
Variable manufacturing overhead	2.80
Import Duties	1.70
Variable selling expense	1.60
Total variable cost	$24.6

Break even price per unit = 24.6 + 9,840/16,400

= $25.2

3.Unit cost relevant is the variable selling cost per unit as manufacturing cost has already been incurred. Hence, the relevant cost is $2.70 per unit

4.Operating Level = 82,000*25%*2/12 = 3,416.67 units

a.CM lost = 3,416.67*24 = $82,000

b.Fixed cost avoided = 492,000*2/12*65% + 287,000*20%*2/12 = $62,866.67

c.Financial Advantage = 62,866.67 – 82,000 = $(19,133.33)

d.No, since disadvantage

5.Reduction in Fixed manufacturing cost 492,000*30% = $147,600

Direct Material = 9.5

Direct Labor = 9

Variable manufacturing overhead = 2.80

Variable selling expense 2.70*1/3 = $0.9

Comparable Per unit cost = $22.2 + 147,600/82,000

= $24