Question

Question 1

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

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 90,000 Daks each year without any increase in fixed manufacturing overhead costs. The company could increase its sales by 25% above the present 60,000 units each year if it were willing to increase the fixed selling expenses by $80,000. Calculate the incremental net operating income.

1-b. Would the increased fixed selling expenses be justified?

	Yes
	No

2. Assume again that Andretti Company has sufficient capacity to produce 90,000 Daks each year. A customer in a foreign market wants to purchase 20,000 Daks. Import duties on the Daks would be $1.70 per unit, and costs for permits and licenses would be $9,000. The only selling costs that would be associated with the order would be $3.20 per unit shipping cost. Compute the per unit break-even price on this order. (Round your answers to 2 decimal places.)

3. The company has 1,000 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 unit cost figure is relevant for setting a minimum selling price? (Round your answer to 2 decimal places.)

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 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%. What would be the impact on profits of closing the plant for the two-month period? (Any losses should be indicated by a minus sign.)

5. An outside manufacturer has offered to produce 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 75%. Because the outside manufacturer would pay for all shipping costs, the variable selling expenses would be only two-thirds of their present amount. Compute the unit cost that can be avoided if purchased from the outside manufacturer. (Do not round intermediate calculations.Round your answers to 2 decimal places.)

Answer 1

1a. Incremental Operating income : $ 130000

Explanation:

Particulars		Amount ($)
Selling Price per unit		32
Less: variable cost per unit
Direct Material	10
Direct Labour	4.5
Variable Manufacturing Overhead	2.3
Varaible Selling & Administrative Expenses	1.2	18
Contribution Margin Per unit		14
No of units (60000*25%)		15000
Total Contribution		210000
Less:Extra selling expenses		80000
Incremental Operating income		130000

Only variable cost is relevant in this case because it is a above normal sales and will not affect regular sales.

1 b. yes, Increase selling price is justified, because it will increase income by $ 130000

2. Break Even price= $ 22.15 per unit

Explanation:

Particulars	Amount ($)
Direct Material	10
Direct Labour	4.5
Variable Manufacturing Overhead	2.3
Varaible Selling & Administrative Expenses	3.2
Import duties	1.7
Total cost per unit	21.7
Number of units	20000
Total variable cost	434000
Costs of permits and license	9000
Total relevant cost	443000
Number of units	20000
Break even price (443000/20000)	22.15
Break even price is the price at which there is no profit and no loss. Since Fixed expenses will anyhow will be incurred only relevant cost is taken into consideration. So, Andretti company break even price is $ 22.15 per unit

3.Variable cost is relevant for setting minimum price , since that is the cost that must be recovered. So, $ 18 (10+4.50+2.30+1.20)

4. Loss will reduce to $ 192000

Explanation:

If Business continue
Particulars	Amount ($)
Selling Price per unit	32
Less: Varaible Cost	18
Contribution margin	14
Sales unit during strikes (60000*30%)	18000
Total Contribution	252000
Less:
Fixed manufacturing Overhead cost	300000
Fixed Selling Cost	210000
Profit for one month	-258000
Period of strike	2 months
Net Profit during strike period	-516000
Saving if business temporarily shuts down
Particulars	Amount ($)
Saving in Fixed manufacturing cost (300000*40%)	120000
Saving in Fixed selling cost (210000*20%)	42000
Total Saving	162000
Period of strike	2 months
Total saving	324000
Statement showing impact on profit
Particulars	Amount ($)
Loss if business continues	-516000
Less:
Saving if shuts down	324000
Loss will reduce by	-192000