Question

Andretti Company has a single product called a Dak. The company normally produces and sells 75,000 Daks each year at a selling price of $47 per unit. The company’s unit costs at this level of activity follow:

  

Direct materials	$	15.00
Direct labour		9.50
Variable manufacturing overhead		7.30
Fixed manufacturing overhead		5.00	$375,000 total
Variable selling expenses		2.70
Fixed selling expenses		3.50	$262,500 total
Total cost per unit	$	43.00

  

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 150,000 Daks every year without any increase in fixed manufacturing overhead costs. The company could increase its sales by 25% above the present 75,000 units each year if it were willing to increase the fixed selling expenses by $28,125.

  

a.	Calculate the incremental net operating income. (Do not round intermediate calculations.)

    

b.	Would the increased fixed expenses be justified?
	Yes No

  

2.

Assume again that Andretti Company has sufficient capacity to produce 150,000 Daks every year. A customer in a foreign market wants to purchase 25,000 Daks. Import duties on the Daks would be $2.70 per unit, and costs for permits and licences would be $11,250. The only selling costs that would be associated with the order would be $4.70 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.)

  

      

3.

The company has 1,500 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 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.)

  
      

5.

An outside manufacturer has offered to produce Daks for Andretti Company and to 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 overhead costs would be reduced by 75% of their present level. Since the outside manufacturer would pay all the costs of shipping, the variable selling costs would be only two-thirds of their present amount. Compute the unit cost figure relevant for comparison to whatever quoted price is received from the outside manufacturer. (Do not round intermediate calculations. Round your answer to 2 decimal places.)

      

Answer 1

	Contribution margin
	selling price per unit		47
	less Variable expenses
	direct materials	15
	direct labor	9.5
	Variable manufacturing overhead	7.3
	variable selling expense	2.7	34.5
	Contribution margin per unit		12.5
1a)	increased sales in units (75000*25%)	18750
	contribution margin per unit	12.5
	incremental contribution margin	234375
	less added fixed selling expense	28,125
	incremental net operarting income	206,250
1b)	Yes
2)	Break even price per unit
	Variable manufacturing cost per unit (15+9.5+7.3)	31.8
	Shipping cost	4.7
	import duties	2.7
	permits &licences (11250/25000)	0.45
	Break even price per unit	39.65
3)	Relevant unit cost	$2.70	per unit
	(only selling expense will be incurred to sell irregualr units, rest is sunk cost)
4)	Contribution margin lost (3750*12.5)		-46875
	fixed costs
	fixed manufacturing overhead cost (375000*2/12)*60%	37500
	fixed selling cost (262500*2/12)*20%	8750	46250
	net advantage of closing the plant		-625
	75000*30%*2/12=	3750	units
5)	Variable manfuacturing costs	31.8
	fixed manufacturing overhead cost (5*30%)	1.5
	variable selling expense (2.7*1/3)	0.9
	total costs avoided	34.2