In: Accounting
Andretti Company has a single product called a Dak. The company
normally produces and sells 83,000...
Andretti Company has a single product called a Dak. The company
normally produces and sells 83,000 Daks each year at a selling
price of $54 per unit. The company’s unit costs at this level of
activity are given below: Direct materials $ 7.50 Direct labor
11.00 Variable manufacturing overhead 3.50 Fixed manufacturing
overhead 7.00 ($581,000 total) Variable selling expenses 2.70 Fixed
selling expenses 3.00 ($249,000 total) Total cost per unit $ 34.70
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 107,900 Daks
each year without any increase in fixed manufacturing overhead
costs. The company could increase its unit sales by 30% above the
present 83,000 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 107,900 Daks each year. A customer in a foreign market
wants to purchase 24,900 Daks. If Andretti accepts this order it
would have to pay import duties on the Daks of $3.70 per unit and
an additional $17,430 for permits and licenses. The only selling
costs that would be associated with the order would be $2.50 per
unit shipping cost. What is the break-even price per unit on this
order? 3. The company has 600 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 35% 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 83,000
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?