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	$	6.50
Direct labor		10.00
Variable manufacturing overhead		3.40
Fixed manufacturing overhead		3.00	($264,000 total)
Variable selling expenses		3.70
Fixed selling expenses		3.00	($264,000 total)
Total cost per unit	$	29.60

A number of questions relating to the production and sale of Daks follow. Each question is independent.

Required:

1- Assume that Andretti Company has sufficient capacity to produce 114,400 Daks each year without any increase in fixed manufacturing overhead costs. The company could increase its unit sales by 30% above the present 88,000 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?

2. Assume again that Andretti Company has sufficient capacity to produce 114,400 Daks each year. A customer in a foreign market wants to purchase 26,400 Daks. If Andretti accepts this order it would have to pay import duties on the Daks of $4.70 per unit and an additional $21,120 for permits and licenses. The only selling costs that would be associated with the order would be $1.60 per unit shipping cost. What is the break-even price per unit on this order? (Round your answers to 2 decimal places.)

3. The company has 400 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? (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 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. (Round number of units produced to the nearest whole number. Round your intermediate calculations and final answers to 2 decimal places. Any losses/reductions should be indicated by a minus sign.)

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?

5. An outside manufacturer has offered to produce 88,000 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?  (Do not round intermediate calculations. Round your answers to 2 decimal places.)

Answer 1

Solution 1-a:
Computation of Contribution Margin per unit
Selling price per unit		58.00
Less: variable expenses:
Direct materials	6.50
Direct labor	10.00
Variable manufacturing Overhead	3.40
Variable selling expense	3.70	23.60
Contribution margin per unit		34.40
Increased Sales In units (88000*30%)	26400
Contribution margin per unit	34.4
Incremental Contribution margin	908160
Less: Added Fixed selling expense	140000
Incremental Net Operating Income	768160
Solution 1-b:
Yes, Additional investment would be justified.
Solution 2:
Variable Manufacturing Cost per unit	19.90
Import Duties per unit	4.70
Permits and licenses ($21120/26400)	0.80
Shipping cost per unit	1.60
Break even price per unit	27.00
Solution 3:
Relevant unit cost (Variable selling expesne)	3.70
Solution 4: (a, b, c, d)
Units for two months (88000*25%*2/12)	3667
Contribution margin per unit	34.40
Contribution margin forgone (a)	126133
Fixed costs:
Fixed manufacturing overhead cost ($264000*2/12*65%)	28600
Fixed selling cost ($264000*2/12*20%)	8800
Total Fixed cost Avoidance	37400
Net Advantage (disadvantage) of closing the plant (c )= b-a	-88733
Should Andretti close the plant for Two months? (d)	No
Solution 5:
Variable manufacturing cost	19.90
Fixed manufacturing overhead cost ($3*30%)	0.90
Variable selling expense ($3.70*1/3)	1.23
Total Costs Avoided	22.03