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.              29.00
A number of questions relating to the production and sale of Daks follow. Each question is independent.
1. Assume that Andretti company has sufficient capacity to produce 118800 Daks each year without any increase in fixed manufacturing overhead costs. The company could increase its unit sales by 35 % above the present 88000 units each year if it were willing to increase the fixed selling expenses by 140000. What is the financial advantage, disadvantage of investing an additional 140000 in fixed selling expenses?
Would the additional investment be justified?
2. Assume again that Andretti company has sufficient capacity to produce 118800 Daks each year. A customer in a foreign market wants to purchase 30800 Daks. If Andretti accepts this order it would have to pay import duties on the Daks of 1.70 per unit and an additional 27720 for permits and licenses. The only selling costs that would be associated with the order would be 1.40 per unit shipping cost. What is the break even price per unit on this order?
3. The company has 800 Daks on hand that have some irregularities and are therefore considered to be second. 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 excepted to last for two months. Andretti company has enough material on hand to operate at 25 % of normal levels for the two months 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.

Answer 1

Solution 1-a:
Computation of Contribution Margin per unit
Selling price per unit		56.00
Less: variable expenses:
Direct materials	6.50
Direct labor	9.00
Variable manufacturing Overhead	3.30
Variable selling expense	2.70	21.50
Contribution margin per unit		34.50
Increased Sales In units (88000*35%)	30800
Contribution margin per unit	$34.50
Incremental Contribution margin	$1,062,600.00
Less: Additional Fixed selling expense	$140,000.00
Incremental Net Operating Income	$922,600.00
Solution 1-b:
Yes, Additional investment would be justified.
Solution 2:
Variable Manufacturing Cost per unit	$18.80
Import Duties per unit	$1.70
Permits and licenses ($27,720 / 30800)	$0.90
Shipping cost per unit	$1.40
Break even price per unit	$22.80
Solution 3:
Relevant unit cost (Variable selling expenses)	$2.70

Note: 4th part requirement is incomplete therefore cannot be answered.