Question

Andretti Company has a single product called a Dak. The company normally produces and sells 72,000 Daks each year at a selling price of $44 per unit. The company’s unit costs at this level of activity follow:

Direct materials	$	14.00
Direct labour		8.50
Variable manufacturing overhead		6.30
Fixed manufacturing overhead		5.00	$360,000 total
Variable selling expenses		2.40
Fixed selling expenses		3.50	$252,000 total
Total cost per unit	$	39.70

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 materials on hand to continue to operate at 30% 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 overhead costs would continue at 60% of their normal level during the two-month period; the fixed selling costs would be reduced by 20% while the plant was closed. What would be the dollar advantage or disadvantage of closing the plant for the two-month period? (Do not round intermediate calculations.)

Answer 1

Answer is given below

Contribution forgone is compared with avoidable fixed cost to arrive at decision.