Question

Andretti Company has a single product called a Dak. The company normally produces and sells 83,000 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 $ 9.50

Direct labor 9.00

Variable manufacturing overhead 2.30

Fixed manufacturing overhead 9.00 ($747,000 total)

Variable selling expenses 2.70

Fixed selling expenses 3.50 ($290,500 total)

Total cost per unit $ 36.00

1-a. Assume that Andretti Company has sufficient capacity to produce 103,750 Daks each year without any increase in fixed manufacturing overhead costs. The company could increase its unit sales by 25% above the present 83,000 units each year if it were willing to increase the fixed selling expenses by $100,000. What is the financial advantage (disadvantage) of investing an additional $100,000 in fixed selling expenses?

1-b. Would the additional investment be justified?

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.

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?

Answer 1

Ques 1

1-a
Increased Sales in units(83,000*25%)	20,750		Sales	$      60.00
Contribution Magin per unit	$                                               36.50		Less:
Incremental contribution Margin	$                                          757,375		Direct Material	$        9.50
Less:Added fixed selling expense	$                                          100,000		Direct Labor	$        9.00
Incremental net operating income	$                                          657,375		Variable Manufacturing overhead	$        2.30
			Variable selling Expenses	$        2.70
			Contribution Magin per unit	$      36.50
1-b)Yes investment Is justified as it leads to increas in income by $657,375

Ques 4

4)
If plant operates at 25% normal capacity , then
83,000 units per year * 2/12 months=	13833
13833 units * 25%=	3458	units produced and sold
Contribution Margin lost if plant Is closed will be
3458 units * $36.50	$                                          126,229
Fixed Costs that can e avoided ig plant is closed
Fixed Manufacturing Overhead cost($747,000*2/12*65%)		80925
Fixed selling costs($290,500 *2/12*20%)		9683
Contribution Margin Lost		$       (126,229)
Fixed costs
Fixed manufacturing overhead cost	$                                             80,925
Fixed selling cost	$                                               9,683	$            90,608
Net disadvantage of closing the plant		$          (35,621)
Andretti company should not close the plant for two months from the above calculations