Question

Andretti Company has a single product called a Dak. The company normally produces and sells 84,000 Daks each year at a selling price of $42 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		2.70
Fixed manufacturing overhead		9.00	($756,000 total)
Variable selling expenses		2.70
Fixed selling expenses		6.50	($546,000 total)
Total cost per unit	$	39.40

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 113,400 Daks each year without any increase in fixed manufacturing overhead costs. The company could increase its sales by 35% above the present 84,000 units each year if it were willing to increase the fixed selling expenses by $110,000. Calculate the incremental net operating income. (Round all dollar amounts to 2 decimal places.)

          

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

2.

Assume again that Andretti Company has sufficient capacity to produce 113,400 Daks each year. A customer in a foreign market wants to purchase 29,400 Daks. Import duties on the Daks would be $3.70 per unit, and costs for permits and licenses would be $23,520. The only selling costs that would be associated with the order would be $1.50 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 600 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 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 40% 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? (Enter losses/reductions with a minus sign. Round all calculations (intermediate and final) to whole numbers. Round unit calculations to whole numbers.)

            

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 30%. 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 is relevant for comparison to the price quoted by the outside manufacturer. (Do not round intermediate calculations. Round your answer to 2 decimal places.)

          

Answer 1

Part 1 A

Increased sales in units (84000*35%)	29400
Contribution margin Per unit (selling price per unit - variable cost per unit) (42-(7.50+11+2.70+2.70)	18.10
Increased contribution margin	532140
Less added fixed selling expenses	110000
Net operating income	422140

Part 1 B

Yes. It would lead to increase in the net operating income

Part 2

Variable manufacturing cost per unit (7.50+11+2.70)	21.20
Import duties per unit	3.70
Permits and licenses (23520/29400)	0.80
Shipment cost per unit	1.50
Breakeven price per unit	27.20

Part 3

Relevant unit cost = $2.70 per unit

Part 4

Contribution margin lost (84000*2/12*25%)*18.10		(63350)75p
Fixed costs
Fixed manufacturing overhead cost (756000*2/12*60%)	75000
Fixed selling cost (546000*2/12*20%)	18200	93200
Net disadvantage of closing the plant		29850

Part 5

Variable manufacturing cost	21.20
Fixed manufacturing overhead (9*30%)	2.70
Variable selling expense	0.90
Total costs avoided	24.8