Question

Andretti Company has a single product called a Dak. The company normally produces and sells 88,000 Daks each year at a selling price of $58 per unit. The company’s unit costs at this level of activity are given below:

Direct materials	$	9.50
Direct labor		9.00
Variable manufacturing overhead		3.10
Fixed manufacturing overhead		4.00	($352,000 total)
Variable selling expenses		3.70
Fixed selling expenses		3.50	($308,000 total)
Total cost per unit	$	32.80

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 118,800 Daks each year without any increase in fixed manufacturing overhead costs. The company could increase its unit sales by 35% above the present 88,000 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 118,800 Daks each year. A customer in a foreign market wants to purchase 30,800 Daks. If Andretti accepts this order it would have to pay import duties on the Daks of $2.70 per unit and an additional $24,640 for permits and licenses. The only selling costs that would be associated with the order would be $2.00 per unit shipping cost. What is the break-even price per unit on this order?

3. The company has 700 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?

Answer 1

1-a.

Increased sales in units (88000 x 35%)	30800
Contribution margin per unit*	32.70
Incremental contribution margin	1007160
Less added fixed selling expense	110000
Financial advantage (disadvantage)	897160

*Contribution margin per unit
Sales price $	58.00
Less variable costs:
Direct materials	9.50
Direct labor	9.00
Variable manufacturing overhead	3.10
Variable selling expense	3.70
Total variable costs	25.30
Contribution per unit $	32.70

1-b. Yes.

The additional investment in fixed selling expenses would be justified since it would result in a financial advantage of $897160.

2.

Variable manufacturing cost per unit ($25.30 - $3.70)	21.60
Import duties per unit	2.70
Permits and licenses ($24640/30800)	0.80
Shipping cost per unit	2.00
Break-even price per unit	27.10

3. Relevant unit cost: $3.70 per unit

The variable selling expense is the only relevant cost for setting the minimum selling price since it is a future cost while all other costs are sunk costs.