Question

Andretti Company has a single product called a Dak. The company normally produces and sells 88000 Daks each year at a selling price of 56 per unit. The companys unit costs at this level of activity are given below:
Direct materials 6.50
direct labor         9.00
variable manufacturing overhead 3.30
fixed manufacturing overhead.   4.00 ( 352000 total)
variable selling expenses 2.70
fixed selling expenses 3.50 ( 308000 total)
total cost per unit 29 $
A number of questions relating to the production and sale of Daks follow.
How much total contribution margin will Andretti forgo if it closes the plant for two months?
how much total fixed cost will the company avoid if it closes the plant for two months?
what is the financial advantage, disadvantage of closing the plant for the two month period?

Answer 1

Annual fixed manufacturing overhead cost = $352,000

Monthly fixed manufacturing overhead cost = 352,000/12

= $29,333.33

Annual fixed selling expense = $308,000

Monthly fixed selling expense = 308,000/12

= $25,666.67

Variable cost per unit = Direct material + Direct labor + variable manufacturing overhead + variable selling expenses

= 6.50 + 9 + 3.30 + 2.70

= $21.5

Selling price per unit = $56

Contribution margin per unit = Selling price per unit - Variable cost per unit

= 56 - 21.5

= $34.5

Annual sales = 88,000 units

Monthly sales = 88,000/12

= 7,333.33 units

1.

Total contribution margin lost if plant is closed for 2 months = Contribution margin per unit x Monthly sales x 2

= 34.5 x 7,333.33 x 2

= $506,000

2.

Savings in fixed cost if Plant is closed for two months = Monthly fixed manufacturing overhead x 2 + Monthly fixed selling expense x 2

= 29,333.33 x 2 + 25,666.67 x 2

= 58,666.67 + 51,333.33

= $110,000

3.

Financial disadvantage of closing the plant for 2 months = Savings in fixed cost if Plant is closed for two months - Total contribution margin lost if plant is closed for 2 months

= 110,000 - 506,000

= -$396,000