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 $58 per unit. The company’s unit costs at this level of activity are given below:

Direct materials	$	8.50
Direct labor		11.00
Variable manufacturing overhead		2.60
Fixed manufacturing overhead		9.00	($783,000 total)
Variable selling expenses		2.70
Fixed selling expenses		4.00	($348,000 total)
Total cost per unit	$	37.80

A number of questions relating to the production and sale of Daks follow. Each question is independent.

Required:

1-a. Assume that Andretti Company has sufficient capacity to produce 108,750 Daks each year without any increase in fixed manufacturing overhead costs. The company could increase its unit sales by 25% above the present 87,000 units each year if it were willing to increase the fixed selling expenses by $140,000. What is the financial advantage (disadvantage) of investing an additional $140,000 in fixed selling expenses?

1-b. Would the additional investment be justified?

2. Assume again that Andretti Company has sufficient capacity to produce 108,750 Daks each year. A customer in a foreign market wants to purchase 21,750 Daks. If Andretti accepts this order it would have to pay import duties on the Daks of $4.70 per unit and an additional $13,050 for permits and licenses. The only selling costs that would be associated with the order would be $2.20 per unit shipping cost. What is the break-even price per unit on this order?

3. The company has 700 Daks on hand that have some irregularities and are therefore considered to be "seconds." Due to the irregularities, it will be impossible to sell these units at the normal price through regular distribution channels. What is the unit cost figure that is relevant for setting a minimum selling price?

Financial Advantage?

Break-even Price per Unit?

Relevant unit cost?

Answer 1

Calculation of contribution margin per Dak
Selling price	58
Less: variable costs
Direct Material	8.5
Direct Labor	11
Variable Overhead	2.6
Variable Selling Expenses	2.7
Total Variable cost	24.8
Contribution Margin per Unit	33.2
1-a Financial Advantage = Additional contribution Margin - Increased expenses
=21,750*33.2– 140,000 = $582,100
1-B yes, since benefit
2.Calculation of break even price
Direct Material	8.5
Direct Labor	11
Variable Overhead	2.6
Import Duties	4.7
Selling expenses	2.2
Total variable cost	29
Break even price = 29 + 13050/21750 = $29.6
3.Relevant cost is the variable selling expense since manufacturing cost has already been incurred i.e. $2.70 per unit