Question
In: Accounting
Andretti Company has a single product called a Dak. The company normally produces and sells 82,000...
Andretti Company has a single product called a Dak. The company normally produces and sells 82,000 Daks each year at a selling price of $56 per unit. The company’s unit costs at this level of activity are given below:
| Direct materials | $ | 9.50 | |
| Direct labor | 11.00 | ||
| Variable manufacturing overhead | 2.20 | ||
| Fixed manufacturing overhead | 7.00 | ($574,000 total) | |
| Variable selling expenses | 1.70 | ||
| Fixed selling expenses | 3.50 | ($287,000 total) | |
| Total cost per unit | $ | 34.90 | |
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?
Solutions
Expert Solution
| a.Contribution margin lost if plant is shut for 2 months | ||||||
| Total sales units during the year | 82000 units | |||||
| Sales unit in a month | 82000/12 | |||||
| 6833 units | ||||||
| Sales unit in two months | 6833*2 | |||||
| 13666 units | ||||||
| Contribution margin per unit | $24.40 | |||||
| Contribution lost in two months | Contribution margin per unit* sales unit in two months | |||||
| 13666*31.6 | ||||||
| 431845.6 | ||||||
Notes:
| Calculation of Contribution margin per unit | ||
| Amount ($) | ||
| Selling price per unit (A) | 56 | |
| Less: Variable cost | ||
| Direct Materials | 9.5 | |
| Direct Labour | 11 | |
| Variable Manufacturing Overhead | 2.2 | |
| Variable Selling Expense | 1.7 | |
| Total Variable cost (B) | 24.4 | |
| Contribution margin (A-B) | 31.6 | |
| b. Avoidable fixed cost | |||
| Saving in fixed manufacturing overhead | 373100 | $ 574000*65% | |
| Saving in fixed selling expenses | 57400 | $ 287000*20% | |
| 430500 | |||
| c. Financial disadvantage of closing plant | |||
| Contribution lost | $431845.6 | ||
| Less :Saving in fixed cost | 430500 | ||
| Net loss | 1345.6 | ||
ekkarill92 answered 1 year agoRelated Solutions
Andretti Company has a single product called a Dak. The company normally produces and sells 82,000...
Andretti Company has a single product called a Dak. The company
normally produces and sells 82,000 Daks each year at a selling
price of $62 per unit. The company’s unit costs at this level of
activity are given below:
Direct materials
$
6.50
Direct labor
10.00
Variable manufacturing overhead
3.50
Fixed manufacturing overhead
5.00
($410,000 total)
Variable selling expenses
3.70
Fixed selling expenses
4.00
($328,000 total)
Total cost per unit
$
32.70
A number of questions relating to the production...
Andretti Company has a single product called a Dak. The company normally produces and sells 82,000...
Andretti Company has a single product called a Dak. The company
normally produces and sells 82,000 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
$
8.50
Direct labor
9.00
Variable manufacturing overhead
3.40
Fixed manufacturing overhead
10.00
($820,000 total)
Variable selling expenses
2.70
Fixed selling expenses
3.00
($246,000 total)
Total cost per unit
$
36.60
A number of questions relating to the production...
Andretti Company has a single product called a Dak. The company normally produces and sells 82,000...
Andretti Company has a single product called a Dak. The company
normally produces and sells 82,000 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
$
6.50
Direct labor
10.00
Variable manufacturing overhead
3.00
Fixed manufacturing overhead
8.00
($656,000 total)
Variable selling expenses
4.70
Fixed selling expenses
3.50
($287,000 total)
Total cost per unit
$
35.70
A number of questions relating to the production...
Andretti Company has a single product called a Dak. The company normally produces and sells 82,000...
Andretti Company has a single product called a Dak. The company
normally produces and sells 82,000 Daks each year at a selling
price of $62 per unit. The company’s unit costs at this level of
activity are given below:
Direct materials
$
9.50
Direct labor
11.00
Variable manufacturing overhead
2.30
Fixed manufacturing overhead
5.00
($410,000 total)
Variable selling expenses
2.70
Fixed selling expenses
4.00
($328,000 total)
Total cost per unit
$
34.50
A number of questions relating to the production...
Andretti Company has a single product called a Dak. The company normally produces and sells 82,000...
Andretti Company has a single product called a Dak. The company
normally produces and sells 82,000 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
$
8.50
Direct labor
8.00
Variable manufacturing overhead
3.30
Fixed manufacturing overhead
9.00
($738,000 total)
Variable selling expenses
1.70
Fixed selling expenses
3.00
($246,000 total)
Total cost per unit
$
33.50
A number of questions relating to the production...
Andretti Company has a single product called a Dak. The company normally produces and sells 82,000...
Andretti Company has a single product called a Dak. The company
normally produces and sells 82,000 Daks each year at a selling
price of $56 per unit. The company’s unit costs at this level of
activity are given below:
Direct materials
$
7.50
Direct labor
12.00
Variable manufacturing overhead
2.00
Fixed manufacturing overhead
3.00
($246,000 total)
Variable selling expenses
4.70
Fixed selling expenses
4.50
($369,000 total)
Total cost per unit
$
33.70
A number of questions relating to the production...
Andretti Company has a single product called a Dak. The company normally produces and sells 82,000...
Andretti Company has a single product called a Dak. The company
normally produces and sells 82,000 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
$
8.50
Direct labor
9.00
Variable manufacturing overhead
3.50
Fixed manufacturing overhead
6.00
($492,000 total)
Variable selling expenses
3.70
Fixed selling expenses
4.00
($328,000 total)
Total cost per unit
$
34.70
A number of questions relating to the production...
Andretti Company has a single product called a Dak. The company normally produces and sells 82,000...
Andretti Company has a single product called a Dak. The company
normally produces and sells 82,000 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
12.00
Variable manufacturing overhead
2.60
Fixed manufacturing overhead
9.00
($738,000 total)
Variable selling expenses
2.70
Fixed selling expenses
3.00
($246,000 total)
Total cost per unit
$
38.80
A number of questions relating to the production...
Andretti Company has a single product called a Dak. The company normally produces and sells 82,000...
Andretti Company has a single product called a Dak. The company
normally produces and sells 82,000 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
$
6.50
Direct labor
10.00
Variable manufacturing overhead
1.90
Fixed manufacturing overhead
8.00
($656,000 total)
Variable selling expenses
3.70
Fixed selling expenses
3.00
($246,000 total)
Total cost per unit
$
33.10
A number of questions relating to the production...
Andretti Company has a single product called a Dak. The company normally produces and sells 82,000...
Andretti Company has a single product called a Dak. The company
normally produces and sells 82,000 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 8.00
Variable manufacturing overhead 2.50 Fixed manufacturing overhead
3.00 ($246,000 total) Variable selling expenses 3.70 Fixed selling
expenses 4.00 ($328,000 total) Total cost per unit $ 30.70 A number
of questions relating to the production...
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