Question

Pistachio Company has a single product called a Dak. The company normally produces and sells 81,000 Daks each year at a selling price of $56 per unit. The company’s unit costs at this level of activity are given below:

Direct materials	$	7.50
Direct labor		10.00
Variable manufacturing overhead		2.50
Fixed manufacturing overhead		10.00	($810,000 total)
Variable selling expenses		2.70
Fixed selling expenses		2.50	($202,500 total)
Total cost per unit	$	35.20

Due to a strike in its supplier’s plant, Pistachio Company is unable to purchase more material for the production of Daks. The strike is expected to last for two months. Pistachio Company has enough material on hand to operate at 25% of normal levels for the two-month period. As an alternative, Pistachio 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.)
1a-c.
a. How much total contribution margin will Pistachio 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?

1d. An outside manufacturer has offered to produce 81,000 Daks and ship them directly to Pistachio’s customers. If Pistachio 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 Pistachio’s avoidable cost per unit that it should compare to the price quoted by the outside manufacturer? (Do not round intermediate calculations. Round your answers to 2 decimal places.)

avoidable cost per unit _______

Answer 1

1a-c:

Units for two months (81000*25%*2/12)	3375
Contribution margin per unit	$33.30
Contribution margin forgone (a)	$1,12,387.50
Fixed costs:
Fixed manufacturing overhead cost (810000*2/12*65%)	$87,750.00
Fixed selling cost ($205,000*2/12*20%)	$6,750.00
Total Fixed cost Avoidance (b)	$94,500.00
Net Advantage (disadvantage) of closing the plant (c )= b-a	-$17,887.50

1d.

Variable manufacturing cost	20.00
Fixed manufacturing overhead cost ($10*30%)	3.00
Variable selling expense ($2.70*1/3)	0.90
Total Costs Avoided	23.90