Question

Andretti Company has a single product called a Dak. The company normally produces and sells 81,000 Daks each year at a selling price of $48 per unit. The company’s unit costs at this level of activity are given below:

Direct materials	$	8.50
Direct labor		10.00
Variable manufacturing overhead		2.40
Fixed manufacturing overhead		9.00	($729,000 total)
Variable selling expenses		3.70
Fixed selling expenses		5.50	($445,500 total)
Total cost per unit	$	39.10
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%. What would be the impact on profits of closing the plant for the two-month period? Contribution margin lost: ? Fixed Manufacturing overhead cost: ? Fixed selling cost: ?

Answer 1

4)	Contribution margin lost			(3375*23.40)				-78975
	fixed costs
	fixed manufacturing overhead cost				(729000*2/12)*65%		78975
	fixed selling cost				(445,500*2/12)*20%		14850	93825
	net advantage of closing the plant							14850
	81000*2/12*25%=			3375	units

4)	Contribution margin lost			(3375*23.40)				-78975
	fixed costs
	fixed manufacturing overhead cost				(729000*2/12)*65%		78975
	fixed selling cost				(445,500*2/12)*20%		14850	93825
	net advantage of closing the plant							14850
	81000*2/12*25%=			3375	units