Question

Andretti Company has a single product called a Dak. The company normally produces and sells 81,000 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	$	6.50
Direct labor		11.00
Variable manufacturing overhead		3.70
Fixed manufacturing overhead		7.00	($567,000 total)
Variable selling expenses		3.70
Fixed selling expenses		3.00	($243,000 total)
Total cost per unit	$	34.90

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

Required:

2. Assume again that Andretti Company has sufficient capacity to produce 105,300 Daks each year. A customer in a foreign market wants to purchase 24,300 Daks. If Andretti accepts this order it would have to pay import duties on the Daks of $4.70 per unit and an additional $17,010 for permits and licenses. The only selling costs that would be associated with the order would be $2.30 per unit shipping cost. What is the break-even price per unit on this order?

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?

	Forgone contribution margin $ Total avoidable fixed costs $ Financial advantage (disadvantage) $

5. An outside manufacturer has offered to produce 81,000 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?

	Avoidable cost per unit $

Answer 1

Analysis of Given Information:

Production cost Per unit: Direct Material +direct Labor+ Variable Overhead= (6.5+11.00+3.70)=21.20

Variable Selling Cost : 3.7

Total Variable cost:21.20+3.7=24.90

Contribution Per unit: Selling price -Variable Cost= 60-24.90=35.1

Total Fixed Cost : Fixed Overhead +Fixed selling Cost= 567000+243000=810000

Break-even Point : Fixed Overhead/Contribution per unit =810000/35.1=23077 units

Company already selling 81000 units hence is running over break even point and recovering all fixed overhead.

Answer for Part (2)

Company have sufficient Capacity for Additional Order so no additional Fixed would be incurred.

Cost to be considered = Production Cost +Additional Import duty+Permit Charges+Additional Selling Cost

= 21.2 + 4.70 + (17010/24300) +2.30

= $ 28.9

Break-even price for new Order= $28.9

We would not include allocation of fixed cost because Company already recover them.

Answer for Part(4)

We have to analyse both the scenario: First close the Pant for two months and Second Run at 25% Capacity

Case First:

Revenue for two month : 0

Variable cost: 0

Fixed Cost= 35% of Fixed Overhead +(Fixed Selling cost-20%)

= 35% * 567000/12*2+(243000/12*2-20%)

= 33075+32400

= 65475

Net Loss during two Month tenure: $65475

Case 2: Run at 25% Capacity

Units Produced/sold = 81000 units /12*2(For Two months) *25 % Capacity = 3375 units

Contribution Per unit as calculated above : 35.10

Total Contribution : 35.1*3375= $118462.50

Fixed Cost as Calculated above : $810000/12*2= 135000

Net Loss : Fixed Cost-Contribution = 135000- 118462 = $ 16537.5

therefore Company would loose more by shutting down plant for 2 months.

Answer (a) . contribution Lost in case of Shutting down : $118462.5

Answer (b). Avoidable fixed Cost : = Normal Fixed Cost (135000) - Fixed cost in case of Shut down ( 65475) = $69525

Answer (c) Financial Disadvantage by shutting down : Loss in case of Shut down - Loss in case of 25% Capacity Run

= 65475- 16537.5

= $48937.5

Answer Part (5):

Cost can be avoided by accepting third party offer = Production Variable cost per unit as Calculated above + Reduced fixed manufacturing overhead + Variable cost Saved.

= 21.20 + (567000*30%)/81000 + 1/3*3.70

= 21.2 + 2.10 + 1.23

= 24.53

Therefore avoidable Cost = $ 24.53 per unit.