Question

Andretti Company has a single product called a Dak. The company normally produces and sells 60,000 Daks each year at a selling price of $32 per unit. The company’s unit costs at this level of activity are given below:

Direct materials $10.00

Direct labor 4.50

Variable manufacturing overhead 2.30

Fixed manufacturing overhead 5.00 ($300,000 total)

Variable selling expenses 1.20

Fixed selling expenses 3.50 ($210,000 total)

Total cost per unit $26.50

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 30% 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 60% of their normal level during the two-month period and the fixed selling expenses would be reduced by 20% during the two-month period.

Utilizing Excel, create a spreadsheet similar to Exhibit 12-1 to compare alternatives. Display your results using the total cost approach. Utilize formulas for all calculations

EXHIBIT 12–1 Total and Differential Costs

	Current Situation	Situation with New Machine	Differential Costs and Benefits
Sales (5,000 units × $40 per unit)	$200,000	$200,000	$         0
Variable expenses:
Direct materials (5,000 units × $14 per unit)	70,000	70,000	0
Direct labor (5,000 units × $8 per unit; 5,000 units × $5 per unit)	40,000	25,000	15,000
Variable overhead (5,000 units × $2 per unit)	10,000	10,000	0
Total variable expenses	120,000	105,000
Contribution margin	80,000	95,000
Fixed expenses:
Other	62,000	62,000	0
Rental of new machine	0	3,000	(3,000)
Total fixed expenses	62,000	65,000
Net operating income	$      18,000	$      30,000	$12,000

Answer 1

Answer:

	If plant is not closed	If plant is closed	Difference
Sales revenue	$    96,000.00	$                     -	$    96,000.00
Variable expenses:
Direct materials	$    30,000.00	$                     -	$    30,000.00
Direct labor	$    13,500.00	$                     -	$    13,500.00
Variable overhead	$      6,900.00	$                     -	$      6,900.00
Variable selling overhead	$      3,600.00	$                     -	$      3,600.00
Total variable expenses	$    54,000.00	$                     -	$    54,000.00
Contribution margin	$    42,000.00	$                     -	$    42,000.00
Fixed expenses:
Fixed Manufacturing overheads	$    50,000.00	$       30,000.00	$    20,000.00
Fixed selling expenses	$    35,000.00	$       28,000.00	$      7,000.00
Total fixed expenses	$    85,000.00	$       58,000.00	$    27,000.00
Net operating income	$ (43,000.00)	$      (58,000.00)	$    15,000.00

Calculation:

In case of any doubt, please feel free to comment.