Question

Andretti Company has a single product called a Dak. The company normally produces and sells 87,000 Daks each year at a selling price of $62 per unit. The company’s unit costs at this level of activity are given below:

Direct materials	$	7.50
Direct labor		9.00
Variable manufacturing overhead		2.40
Fixed manufacturing overhead		6.00	($522,000 total)
Variable selling expenses		3.70
Fixed selling expenses		3.00	($261,000 total)
Total cost per unit	$	31.60

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?

Answer 1

Answers:-

a)

Particulars	Amount($)	Amount($)
Contribution
Selling price per unit		62
less:Variable Expenses
Direct materials	7.50
Direct labour	9.00
Variable maufacturing overhead	2.40
Varible selling expense	3.70
Total variable expense		22.6
Contribution		39.4

b)&c)

Contribution lost (87,000*2/12*25%)39.4	-1,42,825
Total Avoidable Cost (522,000*2/12*65%)+(261,000*2/12*20%)	65,250
Financial Disadvantage	-77575