Question

Andretti Company has a single product called a Dak. The company normally produces and sells 87,000 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		11.00
Variable manufacturing overhead		2.10
Fixed manufacturing overhead		4.00	($348,000 total)
Variable selling expenses		3.70
Fixed selling expenses		4.00	($348,000 total)
Total cost per unit	$	33.30

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

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 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?

d. Should Andretti close the plant for two months?

Answer 1

3. Minimum selling price : $3.7 is the variable selling expenses as all manufacturing expenses have already been incurred hence irrelevant.
				4. Computation of Income if, Operate at 25% of Normal level
	cost/Unit	Existing Capacity	Operate at 25% of Normal Level
No. of units		87000	21750
Sales	$58.00	$5,046,000	$1,261,500
Less: variable expenses
Direct Material	$8.50	$739,500	$176,375
Direct Labour	$11.00	$957,000	$228,250
Variable Manufacturing Overhead	$2.10	$182,700	$43,575
Variable selling expense	$3.70	$321,900	$76,775
Contribution Margin	$32.70	$2,844,900	$736,525
Less: Fixed expenses
Fixed manufacturing overhead		$348,000	$747,000
Fixed selling expenses		$348,000	$488,000
Net operating Income		$2,148,900	-$498,475
Revised Fixed cost if, close it Plant down
Detail		Existing	Revised
Fixed Manufacuring Overhead		$348,000	$121,800
Fixed Selling Expense		$348,000	$278,400
Total Fixed Cost		$696,000	$400,200
a. Contribution margin of ($736525*2)=$1473050 will be forgo if plant will be shut down for 2 month
b. If, plant will close for 2 month the fixed cost will be saved by company ($696000-$400200)*2 = $591600
c. Financial advantage of closing the plant for 2 month because if it will operate the plat at 25% capacity net loss will be $ 498475 permonth . However if it will cose down the plant the net loss of fixed cost will be $400200 permonth..
				d. Yes Andretti Cshould close the plant for 2 month