Question

Andretti Company has a single product called a Dak. The company normally produces and sells 63,000 Daks each year at a selling price of $35 per unit. The company’s unit costs at this level of activity follow:

  

Direct materials	$	11.00
Direct labour		5.50
Variable manufacturing overhead		3.30
Fixed manufacturing overhead		5.00	$315,000 total
Variable selling expenses		1.50
Fixed selling expenses		3.50	$220,500 total
Total cost per unit	$	29.80

  

A number of questions relating to the production and sale of Daks follow. Consider each question separately.

  

Required:

1.

Assume that Andretti Company has sufficient capacity to produce 100,000 Daks every year without any increase in fixed manufacturing overhead costs. The company could increase its sales by 25% above the present 63,000 units each year if it were willing to increase the fixed selling expenses by $25,625.

  

a.	Calculate the incremental net operating income. (Do not round intermediate calculations.)
	incremental net operating income
Would the increased fixed expenses be justified?
2. Assume again that Andretti Company has sufficient capacity to produce 100,000 Daks every year. A customer in a foreign market wants to purchase 21,000 Daks. Import duties on the Daks would be $1.90 per unit, and costs for permits and licences would be $9,450. The only selling costs that would be associated with the order would be $3.50 per unit shipping cost. Compute the per-unit break-even price on this order. (Do not round intermediate calculations. Round your answer to 2 decimal places.) Break-even price per unit 3. The company has 1,100 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.) Relavant unit cost 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 materials on hand to continue 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 overhead costs would continue at 60% of their normal level during the two-month period; the fixed selling costs would be reduced by 20% while the plant was closed. What would be the dollar advantage or disadvantage of closing the plant for the two-month period? (Do not round intermediate calculations.)	Yes No

Answer 1

Solution 1-a:
Computation of Contribution Margin per unit
Selling price per unit		35.00
Less: variable expenses:
Direct materials	11.00
Direct labor	5.50
Variable manufacturing Overhead	3.30
Variable selling expense	1.50	21.30
Contribution margin per unit		13.70
Increased Sales In units (63000*25%)	15750
Contribution margin per unit	$13.70
Incremental Contribution margin	$215,775.00
Less: Additional Fixed selling expense	$25,625.00
Incremental Net Operating Income	$190,150.00
Solution 1-b:
Yes, Additional investment would be justified.
Solution 2:
Variable Manufacturing Cost per unit	$19.80
Import Duties per unit	$1.90
Permits and licenses ($9,450 / 21000)	$0.45
Shipping cost per unit	$3.50
Break even price per unit	$25.65
Solution 3:
Relevant unit cost (Variable selling expenses)	$1.50
Solution 4: (a, b, c, d)
Units for two months (63000*30%*2/12)	3150
Contribution margin per unit	$13.70
Contribution margin forgone (a)	$43,155.00
Fixed costs:
Fixed manufacturing overhead cost (315000*2/12*40%)	$21,000.00
Fixed selling cost ($220,500*2/12*20%)	$7,350.00
Total Fixed cost Avoidance (b)	$28,350.00
Net Advantage (disadvantage) of closing the plant (c )= b-a	-$14,805.00
Should Andretti close the plant for Two months? (d)	No