Question

Andretti Company has a single product called a Dak. The company normally produces and sells 88,000 Daks each year at a selling price of $58 per unit. The company’s unit costs at this level of activity are given below:

Direct materials	$	7.50
Direct labor		9.00
Variable manufacturing overhead		2.30
Fixed manufacturing overhead		4.00	($352,000 total)
Variable selling expenses		4.70
Fixed selling expenses		3.50	($308,000 total)
Total cost per unit	$	31.00

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 110,000 Daks each year without any increase in fixed manufacturing overhead costs. The company could increase its unit sales by 25% above the present 88,000 units each year if it were willing to increase the fixed selling expenses by $120,000. What is the financial advantage (disadvantage) of investing an additional $120,000 in fixed selling expenses?

1-b. Would the additional investment be justified?

2. Assume again that Andretti Company has sufficient capacity to produce 110,000 Daks each year. A customer in a foreign market wants to purchase 22,000 Daks. If Andretti accepts this order it would have to pay import duties on the Daks of $2.70 per unit and an additional $17,600 for permits and licenses. The only selling costs that would be associated with the order would be $1.80 per unit shipping cost. What is the break-even price per unit on this order?

3. The company has 400 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 35% 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 88,000 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?

Assume that Andretti Company has sufficient capacity to produce 110,000 Daks each year without any increase in fixed manufacturing overhead costs. The company could increase its unit sales by 25% above the present 88,000 units each year if it were willing to increase the fixed selling expenses by $120,000. What is the financial advantage (disadvantage) of investing an additional $120,000 in fixed selling expenses?

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	Financial advantage

Assume again that Andretti Company has sufficient capacity to produce 110,000 Daks each year. A customer in a foreign market wants to purchase 22,000 Daks. If Andretti accepts this order it would have to pay import duties on the Daks of $2.70 per unit and an additional $17,600 for permits and licenses. The only selling costs that would be associated with the order would be $1.80 per unit shipping cost. What is the break-even price per unit on this order? (Round your answers to 2 decimal places.)

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	Break-even price per unit

The company has 400 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? (Round your answer to 2 decimal places.)

	Relevant unit cost per unit

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% during the two-month period. (Round number of units produced to the nearest whole number. Round your intermediate calculations and final answers to 2 decimal places. Any losses/reductions should be indicated by a minus sign.)

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?

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	Forgone contribution margin Total avoidable fixed costs Financial advantage (disadvantage)

An outside manufacturer has offered to produce 88,000 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 answers to 2 decimal places.)

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	Avoidable cost per unit

Answer 1

1	Incremental Income Statement
		Incremental Units	Rate ( $ )	Total ( $ )
	Sales	22,000	58.00	1,276,000
	Variable Cost :
	Direct Material	22,000	7.50	165,000
	Direct Labor	22,000	9.00	198,000
	Variable Manufacturing Overhead	22,000	2.30	50,600
	Variable Selling Expenses	22,000	4.70	103,400
	Total Variable Cost	22,000	23.50	517,000
	Contribution Margin	22,000	34.50	759,000
	Fixed Selling Expenses			120,000
	Operating Income			639,000
	Financial Advantage of investing an additional $ 120,000 in Fixed Selling Expenses will result in Additional Operating Income of $ 639,000
	Financial Advantage	$ 639,000
	Additional Operating Income	$ 639,000
1 b	Yes, the Additional Investment will be justified
2	Statement Showing Breakeven sales price for import order
	Particulars	Amount ( $ )
	Variable Cost of Production per unit
	Direct Material	7.50
	Direct Labor	9.00
	Variable Manufacturing Overhead	2.30
		18.80
	Import Duty	2.70
	Permits ( 17,600 / 22,000)	0.80
	Shipping Cost	1.80
	Total Variable Cost per unit	24.10
	Break even Selling Price	24.10
3	The production cost included in the irregular items are Sunk. AS well, Fixed Selling Expenses are incurred regardless of whether they are sold or not.
	If Selling the Irregular units will still incur the $ 4.70 Variable Selling Expenses per unit.
	Relevant Unit Cost	$ 4.70	per unit
4a.	Contribution Lost if plant is closed = (88,000 *25% * $ 34.50 ) *2 / 12 = $ 126,500
4b.	Avoidable / savings on Fixed Cost :-
	Fixed Manufactring Overhead ( $ 352,000 * 2 /12 ) * 65 % = $ 38,133
	Fixed Selling Expenses ( 308,000 * 2/12) * 20 % = $ 10,266
	Total Fixed Cost Avoidable if company closes plant for 2 months = $ 38,133 + $ 10,267 = 48,400
4c.	Financial Disdvantage of Closing Plant for 2 months = $ 126,500 - $ 48,400 = $ 78,100
4.d	Company Should not close the plant for 2 months
	The answer is No
5	Calculation of Avoidable Cost
	Variable Cost per unit
	Direct Material	7.5
	Direct Labor	9
	Variable Manufacturing Overhead	2.3
	Variable Seling Expenses ( $ 4.70 / 3 )	1.57
	Fixed Manufacturing Expenses ( $ 4 * 30% )	1.2
	Total avoidable Cost per unit	21.57
	Thank You !