Question

Andretti Company has a single product called a Dak. The company normally produces and sells 81,000 Daks each year at a selling price of $56 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		3.70
Fixed manufacturing overhead		6.00	($486,000 total)
Variable selling expenses		2.70
Fixed selling expenses		3.50	($283,500 total)
Total cost per unit	$	31.40

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

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 30% 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 81,000 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?

Answer 1

Part 4 –

4(a)	Unit Sales of Daks for 2 months (81,000 Daks * 2/12)	13500
	Current Contribution Margin Per Unit (Refer Note 1)	$38.10
	Total amount of contribution margin foregone	$514,350
4(b)	Fixed Manufacturing Overhead Per Month ($486,000 / 12)	$40,500
	Total fixed manufacturing overhead costs avoided (40,500*2*70%)	$56,700
	Fixed Selling Expense per month ($283,500 / 12)	$23,625
	Total fixed selling expenses that can be avoided ($23,625*2 months*20%)	$9,450
	Total fixed costs avoided if plant is closed for 2 months	$66,150
4©	Plant does not close and operate at 25% of Capacity for 2 months
	Total Contribution ($514,350*25%)	$128,587.50
	Profit Over 2 months
	Contribution Margin for 2 months	$128,587.50
	Less: Fixed Manufacturing Overhead costs 2 months (40,500*2)	$81,000.00
	Less: Fixed Selling Expense for 2 months (23,625*2)	$47,250.00
	Profit Over 2 months	$337.50
		Operate at 25% Capacity	Close for 2 months
	Contribution Margin	$128,587.50	$0.00
	Fixed Manufacturing Overhead	$81,000.00	$24,300.00
	Fixed Selling Expense	$47,250.00	$37,800.00
	Profit (Loss)	$337.50	-$62,100.00
	The financial disadvantage of closing the plant for two months is a loss (47,487.5+87,000)	-$61,762.50
4(d)	Based on analysis, Andretti should not close the plant

Note 1 –

	$ per unit
Direct materials	$7.50
Direct labor	$8.00
Variable manufacturing overhead	$3.70
Variable selling expenses	$2.70
Relevant/Variable Cost Per Unit	$21.90
Unit Selling Price	$60.00
Less: Variable Cost per unit (Relevant Cost)	$21.90
Contribution margin per unit	$38.10

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Pls ask separate question for other parts problems