Question

Problem 11-18 Relevant Cost Analysis in a Variety of Situations [LO11-2, LO11-3, LO11-4] Andretti Company has a single product called a Dak. The company normally produces and sells 89,000 Daks each year at a selling price of $62 per unit. The company’s unit costs at this level of activity are given below: Direct materials $ 6.50 Direct labor 11.00 Variable manufacturing overhead 3.00 Fixed manufacturing overhead 4.00 ($356,000 total) Variable selling expenses 3.70 Fixed selling expenses 3.50 ($311,500 total) Total cost per unit $ 31.70 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 115,700 Daks each year without any increase in fixed manufacturing overhead costs. The company could increase its unit sales by 30% above the present 89,000 units each year if it were willing to increase the fixed selling expenses by $100,000. What is the financial advantage (disadvantage) of investing an additional $100,000 in fixed selling expenses? 1-b. Would the additional investment be justified? 2. Assume again that Andretti Company has sufficient capacity to produce 115,700 Daks each year. A customer in a foreign market wants to purchase 26,700 Daks. If Andretti accepts this order it would have to pay import duties on the Daks of $3.70 per unit and an additional $18,690 for permits and licenses. The only selling costs that would be associated with the order would be $2.30 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 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 89,000 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

Andretti Company
1a)	Incremental Sales	30%
	Increase Fixed Cost	100000
	Contribution Margin Per Unit
	Selling Price per unit=(A)	$               62.00
	Variable Cost
	Direct Material	$                 6.50
	Direct Labor	$               11.00
	Vaiable Manufacturing Expenses	$                 3.00
	Variable Selling Expenses	$                 3.70
	Total Variable Cost=(B)	$               24.20
	Contribution Margin Per Unit=(C )=(A)-(B)	$               37.80
	Incremental Sales=(89000*.3)	26700
	Increase Fixed Cost	100000
	Incremental Contribution=(89000*$37.80)=(A)	$10,09,260.00
	Less: Incremental Fixed Cost=(B)	$   1,00,000.00
	Incremental Net Income=(C )=(A)-(B)	$   9,09,260.00
	Incremental Net Income =$909260, so ncreased in fixed selling expenses be justified.
1b)	Yes
2)	Import Duty	$                 3.70
	Licence Fees	$      18,690.00
	Shipping cost	$                 2.30
	Additional order of Daks	26700
	Breakeven Price per unit
	Direct Material	$                 6.50
	Direct Labor	$               11.00
	Variable Manufacturing expenses	$                 3.00
	Import duty	$                 3.70
	Licence Fees=($18690/26700)	$                 0.70
	Shipping Cost	$                 2.30
	Breakeven Price per unit	$               27.20
3)	Number of Daks having some irregularity	400
	Minimum selling Price is only variable selling cost,other variable cost are sunk cost for this decision because it is already incurred for production of this Dak.Fixed selling cost are also not relevant because it is not change regardless of whether or not irregular units are sold.
	Minimum Selling Price=	$                 3.70	Per unit
	Relevant Unit Cost=	$                 3.70	Per unit
4)	Plant operated 25% of normal level	25%
	Fixed manufacturing cost saved when plant closed down 2 months	60%
	Selling Manufacturing cost saved	20%
	If the Plant operates25% of the normal level then number of units produced=(89000*2/12*25%)	3708	Units
	Contribution Margin lost for 3542 units=(3708*$37.80)	$ -1,40,175.00
	Fixed Manufacturing cost saved=($356000*2/12*.60)	$      35,600.00
	Fixed selling cost=($311500*2/12*.20)	$      10,383.33
	Net disadvantage of closing plant	$     -94,191.67
5)	Variable Selling expenses saved	1/3
	Fixed Overhead cost saved	30%
	Relevant cost can be avoided when purchase from outside supplier
	Direct Material	6.50
	Direct Labor	11.00
	Variable Overhead	3.00
	Variable Selling & Administerative expenses=($3.70*1/3)	1.23
	Fixed Overhead=($356000*.30)/89000	1.20
	Relevant cost	22.93
	Outside supplier must quote the price less then $22.93 per unit