Question

Please show all calculations.

Andretti Company has a single product called a Dak. The company normally produces and sells 87,000 Daks each year at a selling price of $60 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 2.60 Fixed manufacturing overhead 8.00 ($696,000 total) Variable selling expenses 3.70 Fixed selling expenses 4.50 ($391,500 total) Total cost per unit $ 37.30

A number of questions relating to the production and sale of Daks follow. Each question is independent.

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 87,000 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

Answer 1

Calculation of contribution margin per unit:

Selling Price	$60
Direct Material	7.50
Direct Labour	11.00
Variable Manufacturing Overhead	2.60
Variable Selling Expenses	3.70
Contribution Margin per Unit	$35.2

4. Operation at 25% of normal level i.e. at 25%*87,000*2/12 = 3,625 units

Income Statement will be as follows:

Total Contribution 3,625*35.2	127,600
Fixed Manufacturing Overhead 696,000*2/12	116,000
Fixed Selling Overhead 391,500*2/12	65,250
Operating Income	$(53,650)

If closed,

Fixed Manufacturing Overheads 35%*696,000*2/12	40,600
Fixed Selling Expenses 391,500*80%*2/12	52,200
Total	$(92,800)

a.Contribution Margin lost = $127,600

b.Fixed cost avoided = (116,000-40,600) + (65,250-52,200) = $88,450

c.Financial Advantage/(Disadvantage) of closing = 88,450 – 127,600= $(39,150)

i.e. disadvantage

d, A should not close the plant.

5. Comparable Avoidable Cost per unit will be as follows:

Fixed Manufacturing Overheads = 696,000*30% = $208,800

Decrease in Variable Selling Expenses = 3.7*1/3 = 1.23

Direct Materials = 7.5

Direct Labor = 11

Variable Manufacturing Overhead = 2.60

Hence, comparable avoidable cost per Unit = 208,800/87,000 + 22.33

= $24.73