Question

Andretti Company has a single product called a Dak. The company normally produces and sells 85,000 Daks each year at a selling price of $42 per unit. The company’s unit costs at this level of activity are given below: Direct materials $ 9.50 Direct labor 9.00 Variable manufacturing overhead 3.50 Fixed manufacturing overhead 5.00 ($425,000 total) Variable selling expenses 3.70 Fixed selling expenses 3.50 ($297,500 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 110,500 Daks each year without any increase in fixed manufacturing overhead costs. The company could increase its unit sales by 30% above the present 85,000 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 110,500 Daks each year. A customer in a foreign market wants to purchase 25,500 Daks. If Andretti accepts this order it would have to pay import duties on the Daks of $3.70 per unit and an additional $17,850 for permits and licenses. The only selling costs that would be associated with the order would be $2.10 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 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 85,000 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

1-a

Here the 1st part of the question is to see the profitability of the increase in sale due to increase in the advertiseent expenditure.

The cost of the product = $42 which is inclusive of Fixed overhead per product of $5

Statement showing the profit for the 2 situations
	Sales
Particulars	85000	110500
Total Sale	$ 3,570,000.00	$ 4,641,000.00
Total Cost	$ 2,907,000.00	$ 3,761,600.00
Profit	$    663,000.00	$    879,400.00

Here if we see the COGS , total fixed over head is recovered in manufacturing the first 85000 products so the cost of the additional products produced will cst $5 less (i.e., $37)

and the if we see the profit on percentage basis , it is 33% more. Yes the additional expenditure is justified

1-b

Here we can assume the company is selling 85000 products per annum and the additional order is for 25,500 additional products.

If the company takes the order it have to manufacture 110,500 products.

We have to calculate Break even Price per unit for this order

Here s the order is bulk an specific and the selling expeses are recovered from the noormall production capacity of 85,000. We need not charge any selling expenses for this order.

There fore the price per unit to be considered for this order = $22 ($34.2 - $5 - $7.2)

There are few additional expenses per unit for taking up this order.

Total Order	25,500
Particulars	Amount ($)	Per unit ($)
Cost of the product	561,000	22
Addtional Expenses
Import Duty	94,350	3.7
permits and licenses	17850
Selling costs	53,550	2.1
Total	726,750	28.5

There fore the cost per unit = $28.5

Here to calculate Break even price = formula = (Total fixed cost / Production unit volume) + Variable cost per unit

In the above calculation no fixed costs = Variable cost = break even cost = $28.5

For selling the 400 duks we can take the $28.5 as the price as that is the cost per product

Contribution margin = P-V

Where p = Price per unit

V = Varibale cost per unit

Contribution Margin  

Particulars	Amount ($)	Amount ($)
Selling Price		$              42.00
COGS		$              27.00
Direct Mat	$                9.50
Direct Lab	$                9.00
Over Heads
Variable	$                3.50
Fixed	$                5.00
$425,000
Gross Profit		$              15.00
Selling Expenses		$                7.20
Variable	$                3.70
Fixed	$                3.50
Net Profit		$                7.80
Total Cost		$              34.20

In the above table we have the complete info = $42 - $25.7 = $16.3 = 85000*$16.3 = $1,385,500

The above contribution margin is fr 12 months and for 2 months = $1,385,500/12*2 = $2,309,160.67

The fixed manufcturing over head = $425,000-30% = $297,500

There fore the price to be quoted = $39.33