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.

Required:

1-a. Assume that Andretti Company has sufficient capacity to produce 104,400 Daks each year without any increase in fixed manufacturing overhead costs. The company could increase its unit sales by 20% above the present 87,000 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 104,400 Daks each year. A customer in a foreign market wants to purchase 17,400 Daks. If Andretti accepts this order it would have to pay import duties on the Daks of $3.70 per unit and an additional $10,440 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?

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?

5. An outside manufacturer has offered to produce 87,000 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

The total per unit cost is $ 33.3

If the capacity increases as provided then:

Sales unit = 87000+20%

= 104400

Fixed manufacturing Overhead = 348000/104400

= 3.33

Fixed selling Overhead = 348000+140000

= 488000

= 4.67 p.u

There is no financial disadvantage or advantage if we consider per hnit cost as overall it remains same. But since salea unita increase ,it leads to financial advantage.

Total advantge = (104400-87000) *(58-33.3)

=. 429780

1b) Yes the additional investment is justified as explained above

2) If we sell 17400 daks to foreign purchaser then overall cost per unit :

Import duties . 3.70

Other cost(10440/17400). 0.6

Selling cost . 1.6

Direct Materials . 8.5

Direct labour. 11

Variable Overhead. 2.1

Fixed manufacturing Overhead 3.33

Total . 30.83

Thus break even price per unit is 30.83

3) The unit coat figure relevant for fixing selling price for 600 daks is:

Direct Materials 8.5

Direct labour . 11

Variable Overhead 2.1

Total. 21.6

4) a) If it shuts plant for 2 months then production is 25% ie 21750

Thus total contribution lost = SP- variable manufacturing cost

= 58-8.5-11-2.1

= 36.4 per unit

Total contributions lost = 791700 {36.4*21750)

b) if it closes for 2 months the total saving in fixed coat:

FIXED MANUFACTURING OHs = 348000*65% = 226200

Fixed selling Overhead = 348000*20% = 69600

Total saving 295800

c) The financial disadvantage of closing the firm is

Contribution- fixed cost

= 791700- 348000-348000- (21750*3.7 {variable selling OH})

= 15225

d)No it should not shut the firm for 2 months