Question

Andretti Company has a single product called a Dak. The company normally produces and sells 87,000 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	$	7.50
Direct labor		8.00
Variable manufacturing overhead		3.00
Fixed manufacturing overhead		9.00	($783,000 total)
Variable selling expenses		2.70
Fixed selling expenses		4.00	($348,000 total)
Total cost per unit	$	34.20

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 121,800 Daks each year without any increase in fixed manufacturing overhead costs. The company could increase its unit sales by 40% above the present 87,000 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?

1-b. Would the additional investment be justified?

2. Assume again that Andretti Company has sufficient capacity to produce 121,800 Daks each year. A customer in a foreign market wants to purchase 34,800 Daks. If Andretti accepts this order it would have to pay import duties on the Daks of $3.70 per unit and an additional $27,840 for permits and licenses. The only selling costs that would be associated with the order would be $2.60 per unit shipping cost. What is the break-even price per unit on this order?

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 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 40% 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 87,000 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?

2.Imperial Jewelers manufactures and sells a gold bracelet for $406.00. The company’s accounting system says that the unit product cost for this bracelet is $258.00 as shown below:

Direct materials	$	141
Direct labor		81
Manufacturing overhead		36
Unit product cost	$	258

The members of a wedding party have approached Imperial Jewelers about buying 17 of these gold bracelets for the discounted price of $366.00 each. The members of the wedding party would like special filigree applied to the bracelets that would require Imperial Jewelers to buy a special tool for $462 and that would increase the direct materials cost per bracelet by $5. The special tool would have no other use once the special order is completed.

To analyze this special order opportunity, Imperial Jewelers has determined that most of its manufacturing overhead is fixed and unaffected by variations in how much jewelry is produced in any given period. However, $6.00 of the overhead is variable with respect to the number of bracelets produced. The company also believes that accepting this order would have no effect on its ability to produce and sell jewelry to other customers. Furthermore, the company could fulfill the wedding party’s order using its existing manufacturing capacity.

Required:

1. What is the financial advantage (disadvantage) of accepting the special order from the wedding party?

2. Should the company accept the special order?

Answer 1

	Contribution margin
	selling price per unit				60
	less Variable expenses
	direct materials			7.5
	direct labor			8
	Variable manufacturing overhead			3
	variable selling expense			2.7	21.2
	Contribution margin per unit				38.8
Req 1A	increased sales in units			(87000*40%)		34800
	contribution margin per unit					38.8
	incremental contribution margin					1350240
	less added fixed selling expense					110,000
	incremental net operarting income					1,240,240
1-b)	Yes
Req 2	Break even price per unit
	Variable manufacturing cost per unit			18.5
	Shipping cost			2.6
	import duties			3.7
	permits &licences			0.8
	Break even price per unit			25.6	answer
Req 3	Relevant unit cost		$2.70	per unit
4)	Contribution margin lost			(3625*38.8)				-140650
	fixed costs
	fixed manufacturing overhead cost				(783000*2/12)*60%		78300
	fixed selling cost				(348,000*2/12)*20%		11600	89900
	net disavantage of closing the plant							-50750
	87000*2/12*25%=			3625	units
	No
5)	Variable manfuacturing costs						18.5
	fixed manufacturing overhead cost				(4*30%)=		1.2
	variable selling expense				2.7*1/3		0.90
	total costs avoided						20.60

			per unit	total
incremental revenue			366	6222
incremental costs:
direct materials			141	2397
direct labor			81	1377
variable overhead			6	102
Special filgree			5	85
special tool				462
total incremental costs				4423
incremental net operating income				1799
net financial advantage			$1,799
Yes accept the special order