Question

Andretti Company has a single product called a Dak. The company normally produces and sells 85,000 Daks each year at a selling price of $60 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 3.20 Fixed manufacturing overhead 9.00 ($765,000 total) Variable selling expenses 3.70 Fixed selling expenses 2.50 ($212,500 total) Total cost per unit $ 37.90 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 110,500 Daks each year without any increase in fixed manufacturing overhead costs. The company could increase its unit sales by 30% above the present 85,000 units each year if it were willing to increase the fixed selling expenses by $130,000. What is the financial advantage (disadvantage) of investing an additional $130,000 in fixed selling expenses? 1-b. Would the additional investment be justified? 2. Assume again that Andretti Company has sufficient capacity to produce 110,500 Daks each year. A customer in a foreign market wants to purchase 25,500 Daks. If Andretti accepts this order it would have to pay import duties on the Daks of $2.70 per unit and an additional $17,850 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 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? 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 85,000 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

	Produces & Sells	85000	Daks
	Unit selling price	60
	Direct Material	8.5
	Direct Labour	11
	Variable manufacturing overhead	3.2
	Fixed Manufacturing Overhead	9	765000
	Varible selling overhead	3.7
	Fixed selling	2.5	212500
	Total cost per unit	37.9
1a
A	Selling Price	60
	Direct Material	8.5
	Direct Labour	11
	Variable manufacturing overhead	3.2
	Varible selling overhead	3.7
B	Total variable cost	26.4
C=A-B	Contribution margin per unit	33.6	(60-26.4)
D	Increased volume	110500
E	Present volume	85000
F=D-E	Extra units produced & sold	25500	(110500-85000)
G=C*F	Increase in contribution	856800	(25500*33.6)
	Increase in fixed selling cost	130000
	Extra earning due to increase in volume	726800	(856800-130000)
1b	Yes additional investment is justified because our earning increase by 726800
2	Foreign buyer	25500	units
	Import duties	2.7
	Permits & licence	17850
	Selling cost	1.9
A	Selling Price	60
	Direct Material	8.5
	Direct Labour	11
	Variable manufacturing overhead	3.2
	Varible selling overhead	1.9
	Import duties	2.7
B	Total variable cost	27.3
C=A-B	Contribution margin per unit	32.7	(60-27.3)
	Break even units =Fixed cost/Contribution marin per unit	546	(17850/32.7)
3	The minimum selling price should be $3.7 that is variable selling cost to be incurred for sale of those units.
4	Two month production-Normal	14167	=85000*2/12
	25% OF PRODUCTION	3542	(14167*25%)
	Contributionmargin earned on 25% of production	119000	(3542*26.4)
Less:	Fixed manufacturing cost	127500	(765000*2/12)
	Fixed selling cost	35417	(212500*2/12)
	Gain/(Loss)	-43917
	If shut down for 2 months
	Comtribution	0
Less	Fixed manufacturing cost	44625	(765000*2/12*35%)
	Fixed selling cost	28333	(212500*2/12*80%)
	Gain/(Loss)	-72958
4a	Contribution margin forgo	119000
4b	Fixed cost avoided	89958	(127500+35417-44625-28333)
4C	Financial dis advantage of closing is loss of 72,958 instead of loss of only 43917 if plant continiues
4d	No plant should not be closed
5	Avoidable cost :
	Direct Material	8.5
	Direct Labour	11
	Variable manufacturing overhead	3.2
	Varible selling overhead	1.23	(3.7*1/3)
	Avoidable Fixed manufacturing cost	2.7	(9*30%)
	Cost per unit to be compared to price quoted	26.63