Question

Andretti Company has a single product called a Dak. The company normally produces and sells 60,000 Daks each year at a selling price of $32 per unit. The company’s unit costs at this level of activity are given below:

Direct materials $10.00

Direct labor 4.50

Variable manufacturing overhead 2.30

Fixed manufacturing overhead 5.00 ($300,000 total)

Variable selling expenses 1.20

Fixed selling expenses 3.50 ($210,000 total)

Total cost per unit $26.50

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 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 manufacturing overhead costs would continue at 60% of their normal level during the two-month period and the fixed selling expenses would be reduced by 20% during the two-month period. Utilizing Excel, create a spreadsheet similar to Exhibit 12-1 on page 566 of the textbook to compare alternatives. Display your results using the total cost approach. Utilize formulas for all calculations.

Answer 1

Units can be sold at given capacity	18000
Contribution margin per unit	13.8
Forgone Contribution margin	248400.00
Total avoidable fixed cost	27000.00
Financial Disadvantage	221400.00
No Plant should not be closed
	Annual Cost	Cost for 2 Months	cost which can be avoided
Fixed manufacturing overhead	300000	50000	20,000.00
fixed selling expenses	210000	35000	7,000.00
Total avoidable cost			27,000.00