Question

company produces and sells 87,000 daks each year selling price $62 per unit...

direct materials	$9.50
direct labor	11
variable manufacturing overhead	3.20
fixed manufacturing overhead	6 (522,000 total)
variable selling exp	3.70
fixed selling expenses	3.50 (304,500 TOTAL)
total cost per unit	36.90

1. company has 900 daks on hand with irregularties... what is the unit cost figure that is relevant for setting minimum selling price?

2.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 30% 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?

3. outside manufacturer offered to produce 87,000 and ship directly to andretti's customers- if accept, costs 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

1) Relevant cost for setting minimum selling price will include total variable manufacturing cost per unit which is calculated as follows:-

Relevant cost per unit = Direct Materials+Direct Labor+Variable manufacturing Overhead

= $9.50+$11+$3.20 = $23.70 per unit

2) a) Units that can be produced in two months period = 87,000*25%*2/12 = 3,625 units

Contribution foregone if plant is closed = Units that can be produced*Contribution per unit

= 3,625 units*($62 Sale price - $23.70 Variable manufacturing cost - $3.70 Variable selling exp.)

= 3,625 units*$34.60 = $125,425

b) Saving in Fixed manufacturing overhead costs = ($522,000*2/12)*70% = $60,900

Saving in Fixed Selling expenses = ($304,500*2/12)*20% = $10,150

Total Fixed cost the company can avoid = $60,900+$10,150 = $71,050

c) Financial advantage/(disadvantage) of closing the plant = Saving in Fixed cost - Contribution foregone

= $71,050 - $125,425 = ($54,375)

There is financial disadvantage of closing the plant for the two-month period of $54,375.

3) Andretti’s avoidable cost per unit that it should compare to the price quoted by the outside manufacturer is calculated as follows:- (Amounts in $)

Variable manufacturing cost ($9.50+$11+$3.20)	23.70
Avoidable Fixed manufacturing cost per unit ($6*30%)	1.80
Avoidable Variable Selling expenses ($3.70*1/3)	1.23
Total avoidable cost per unit ($23.70+$1.80+$1.23)	26.73