Question

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 and sale of Daks follow. Each question is independent. Required: 1-a. Assume that Andretti Company has sufficient capacity to produce 106,600 Daks each year without any increase in fixed manufacturing overhead costs. The company could increase its unit sales by 30% above the present 82,000 units each year if it were willing to increase the fixed selling expenses by $140,000. What is the financial advantage (disadvantage) of investing an additional $140,000 in fixed selling expenses? 1-b. Would the additional investment be justified? 2. Assume again that Andretti Company has sufficient capacity to produce 106,600 Daks each year. A customer in a foreign market wants to purchase 24,600 Daks. If Andretti accepts this order it would have to pay import duties on the Daks of $1.70 per unit and an additional $22,140 for permits and licenses. The only selling costs that would be associated with the order would be $1.90 per unit shipping cost. What is the break-even price per unit on this order? 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 is the unit cost figure that is relevant for setting a minimum selling price? 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% 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? d. Should Andretti close the plant for two months? 5. An outside manufacturer has offered to produce 82,000 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. What is Andretti’s avoidable cost per unit that it should compare to the price quoted by the outside manufacturer?

Answer 1

Ans 1-a

Computation of Contribution Per Unit of Dak

Amount $

Sale Price

58

Less:

Direct Material

9.5

Direct Labour

8

Variable Manufacturing OH

2.5

Variable Selling Expenses

3.7

24600

106600

Contribution Per Unit

34.3

Profit When Producing and Selling 82,000 Daks

Total Contribution(82000x34.3)

2812600

Less:

Fixed Manufacturing OH

246000

Fixed Selling Expenses

328000

Net Profit

2238600

Increase in Contribution on Producing and Selling 106600

Increase In Contribution(24600x34.3)

843780

Less:

Addln Selling Expenses

140000

Net Increase in Contribution

703780

Ans 1-b

Since the Addl Expenditure results in increasing Net Contribution by $7,03,780/- it is advisable to invest in Addln Selling exp

Ans 2-b

Calculation Of Break Even Price

Direct Material

9.5

Direct Labour

8

Variable Manufacturing Overhead P/u

2.5

Shipping Cost

1.9

Import Duties

1.7

Total Variable Cost

23.6

Addln Fixed Costs with this Scenario is Permits & License

22140

Permit & License Cost to be

0.9

Recovered from each unit

Break Even Price

24.5

Ans 3-b

The Minimum Selling Price will be Variable Cost of Production

Variable Cost Per Unit

Direct Material

9.5

Direct Labour

8

Variable Manufacturing OH

2.5

Variable Selling Expenses

3.7

Total Variable Manfacturing Cost

23.7

Ans-4

Manufacturing Overhead per Month

20500

Fixed Selling Expenses per Month

27333.33

Shut Down Cost for 2months{(20500*2)*40/100}

16400

{(27333*2)*80/100}

43733

Total Shutdown Cost

60133

If we Run the Plant @ 25% of Normal Level

Production Units For 2 Months(82000/12*2*25/100)

3417

Contribution From Sale of 3417 units

[email protected] per unit

117192

Less:

Fixed Manf OH

41000

Fixed Selling Exp

54666

Net Profit

21526

It Better to Continue Manufacturing @ 25% of Normal Production Level Because the Contribution will Cover Fixed Costs and will also give some Profit

b Fixed Costs Company Will Avoid if Plant not in operation $35533 c If Plant is Closed the Company will Loose profit of $21256 d Plant Shouldn’t be Closed Because it will Result in Loss to the Oraganisation.