Question

Andretti Company has a single product called a Dak. The company normally produces and sells 78,000 Daks each year at a selling price of $50 per unit. The company’s unit costs at this level of activity follow:

  

Direct materials	$	16.00
Direct labour		10.50
Variable manufacturing overhead		8.30
Fixed manufacturing overhead		5.00	$390,000 total
Variable selling expenses		3.00
Fixed selling expenses		3.50	$273,000 total
Total cost per unit	$	46.30

  

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 78,000 units each year if it were willing to increase the fixed selling expenses by $28,750.

  

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 26,000 Daks. Import duties on the Daks would be $2.90 per unit, and costs for permits and licences would be $11,700. The only selling costs that would be associated with the order would be $5.00 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 1,600 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 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

a)
Selling price per unit	$50.00
Less: Variable expenses per unit ($16 + $10.50 + $8.30 + $3)	$37.80
Contribution Margin	$12.20
Increased unit sales (78,000 units × 25%)	19,500	Units
Contribution margin per unit	x $12.20
Incremental contribution margin	$237,900.00
Less: added fixed selling expense	$28,750.00
Incremental net operating income (Financial Advantage of Investing )	$209,150.00
b)
Yes, Additional investment in Fixed Assets would be justified.
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 26,000 Daks. Import duties on the Daks would be $2.90 per unit, and costs for permits and licences would be $11,700. The only selling costs that would be associated with the order would be $5.00 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.)
Variable manufacturing cost per unit = $16 + $10.50 + $8.30	$34.80
Import duties per unit	$2.90
Permits and licenses ($11700 ÷ 26000 units)	$0.45
Shipping cost per unit	$5.00
Break-even price per unit	$43.15
3. The company has 1,600 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.)
The relevant cost is $3 per unit, which is the variable selling expense per Dak.
The variable production costs are sunk and fixed selling expenses are not relevant because they will be incurred whether or not the irregular units are sold
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 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 manufacturing overhead costs would continue at 60% 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 intermediate calculations to 2 decimal places. Round number of units calculation and final answers to nearest whole number.)
	Continue to Operate	Close the Plant
Sales (3900 units x $50)	$195,000.00	$0.00
Less: Variable expenses (3,900 units × $37.80 per unit	$147,420.00	$0.00
Contribution Margin	$47,580.00	$0.00
Contribution margin lost if the plant is closed	-$47,580.00	(a)
Fixed expenses:
Fixed manufacturing overhead cost
$390,000 × 2/12	$65,000.00
$390,000 × 2/12 x 60%		$39,000.00
Fixed selling expense
$273,000 × 2/12	$45,500.00
$273,000 × 2/12 x (1-20%)		$36,400.00
Total Fixed Costs	$110,500.00	$75,400.00
Fixed costs that can be avoided if the plant is closed	$35,100.00	(b)
Net operating income (loss)	-$62,920.00	-$75,400.00
Net disadvantage of closing the plant -$62,920 - (-$75,400)	-$12,480.00
(d) The plant should not be closed
78,000 units per year? × 2/12	13000	units
13,000 units × 30% =	3900	Units Produced and Sold
5
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 75%. 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.)
Variable manufacturing cost	$34.80
Fixed manufacturing overhead cost ($390,000 × 75% = $292,500; $292,500 ÷ 78,000 units	3.75
Variable selling expense ($3 × 1/3)	$1.00
Total costs avoided	$39.55
To be acceptable, the outside manufacturer’s quotation must be less than $39.55 per unit.