Question

Andretti Company has a single product called a Dak. The company normally produces and sells 88,000...

Andretti Company has a single product called a Dak. The company normally produces and sells 88,000 Daks each year at a selling price of $60 per unit. The company’s unit costs at this level of activity are given below:

Direct materials $ 9.50
Direct labor 10.00
Variable manufacturing overhead 2.70
Fixed manufacturing overhead 6.00 ($528,000 total)
Variable selling expenses 2.70
Fixed selling expenses 3.00 ($264,000 total)
Total cost per unit $ 33.90

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 114,400 Daks each year without any increase in fixed manufacturing overhead costs. The company could increase its unit sales by 30% above the present 88,000 units each year if it were willing to increase the fixed selling expenses by $100,000. What is the financial advantage (disadvantage) of investing an additional $100,000 in fixed selling expenses?

1-b. Would the additional investment be justified?

2. Assume again that Andretti Company has sufficient capacity to produce 114,400 Daks each year. A customer in a foreign market wants to purchase 26,400 Daks. If Andretti accepts this order it would have to pay import duties on the Daks of $4.70 per unit and an additional $21,120 for permits and licenses. The only selling costs that would be associated with the order would be $2.70 per unit shipping cost. What is the break-even price per unit on this order?

3. The company has 500 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?

4. 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 30% of their normal level during the two-month period and the fixed selling expenses would be reduced by 20% during the two-month period.

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?

d. Should Andretti close the plant for two months?

5. An outside manufacturer has offered to produce 88,000 Daks and ship them directly to Andretti’s customers. If Andretti 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 Andretti’s avoidable cost per unit that it should compare to the price quoted by the outside manufacturer?

Homework Answers

Answer #1
Solution 1-a:
Computation of Contribution Margin per unit
Selling price per unit 60.00
Less: variable expenses:
Direct materials 9.50
Direct labor 10.00
Variable manufacturing Overhead 2.70
Variable selling expense 2.70 24.90
Contribution margin per unit 35.10
Increased Sales In units (88000*30%) 26400
Contribution margin per unit $35.10
Incremental Contribution margin $926,640.00
Less: Additional Fixed selling expense $100,000.00
Incremental Net Operating Income $826,640.00
Solution 1-b:
Yes, Additional investment would be justified.
Solution 2:
Variable Manufacturing Cost per unit $22.20
Import Duties per unit $4.70
Permits and licenses ($21,120/26400) $0.80
Shipping cost per unit $2.70
Break even price per unit $30.40
Solution 3:
Relevant unit cost (Variable selling expesne) $2.70
Solution 4: (a, b, c, d)
Units for two months (88000*25%*2/12) 3667
Contribution margin per unit $35.10
Contribution margin forgone (a) $128,700
Fixed costs:
Fixed manufacturing overhead cost (528000*2/12*70%) $61,600
Fixed selling cost ($264,000*2/12*20%) $8,800
Total Fixed cost Avoidance (b) $70,400
Net Advantage (disadvantage) of closing the plant (c )= b-a -$58,300
Should Andretti close the plant for Two months? (d) No
Solution 5:
Variable manufacturing cost 22.20
Fixed manufacturing overhead cost ($6*30%) 1.80
Variable selling expense ($2.70*1/3) 0.90
Total Costs Avoided 24.90
Know the answer?
Your Answer:

Post as a guest

Your Name:

What's your source?

Earn Coins

Coins can be redeemed for fabulous gifts.

Not the answer you're looking for?
Ask your own homework help question
Similar Questions
Andretti Company has a single product called a Dak. The company normally produces and sells 88,000...
Andretti Company has a single product called a Dak. The company normally produces and sells 88,000 Daks each year at a selling price of $60 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 2.80 Fixed manufacturing overhead 9.00 ($792,000 total) Variable selling expenses 2.70 Fixed selling expenses 3.00 ($264,000 total) Total cost per unit $ 35.00 A number of questions relating to the production...
Andretti Company has a single product called a Dak. The company normally produces and sells 88,000...
Andretti Company has a single product called a Dak. The company normally produces and sells 88,000 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 $ 9.50 Direct labor 9.00 Variable manufacturing overhead 1.90 Fixed manufacturing overhead 6.00 ($528,000 total) Variable selling expenses 2.70 Fixed selling expenses 4.50 ($396,000 total) Total cost per unit $ 33.60 A number of questions relating to the production...
Andretti Company has a single product called a Dak. The company normally produces and sells 83,000...
Andretti Company has a single product called a Dak. The company normally produces and sells 83,000 Daks each year at a selling price of $60 per unit. The company’s unit costs at this level of activity are given below: Direct materials $ 9.50 Direct labor 9.00 Variable manufacturing overhead 2.30 Fixed manufacturing overhead 9.00 ($747,000 total) Variable selling expenses 2.70 Fixed selling expenses 3.50 ($290,500 total) Total cost per unit $ 36.00 A number of questions relating to the production...
Andretti Company has a single product called a Dak. The company normally produces and sells 82,000...
Andretti Company has a single product called a Dak. The company normally produces and sells 82,000 Daks each year at a selling price of $46 per unit. The company’s unit costs at this level of activity are given below: Direct materials $ 6.50 Direct labor 9.00 Variable manufacturing overhead 2.50 Fixed manufacturing overhead 4.00 ($328,000 total) Variable selling expenses 2.70 Fixed selling expenses 4.50 ($369,000 total) Total cost per unit $ 29.20 A number of questions relating to the production...
Andretti Company has a single product called a Dak. The company normally produces and sells 87,000...
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 $56 per unit. The company’s unit costs at this level of activity are given below: Direct materials $ 6.50 Direct labor 8.00 Variable manufacturing overhead 3.80 Fixed manufacturing overhead 10.00 ($870,000 total) Variable selling expenses 1.70 Fixed selling expenses 2.50 ($217,500 total) Total cost per unit $ 32.50 A number of questions relating to the production...
Andretti Company has a single product called a Dak. The company normally produces and sells 120,000...
Andretti Company has a single product called a Dak. The company normally produces and sells 120,000 Daks each year at a selling price of $46 per unit. The company’s unit costs at this level of activity are given below: Direct materials $ 6.50 Direct labor 8.00 Variable manufacturing overhead 3.80 Fixed manufacturing overhead 4.00 ($480,000 total) Variable selling expenses 3.70 Fixed selling expenses 4.50 ($540,000 total) Total cost per unit $ 30.50 4. Due to a strike in its supplier’s...
Andretti Company has a single product called a Dak. The company normally produces and sells 60,000...
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 A number of questions relating to the production...
Andretti Company has a single product called a Dak. The company normally produces and sells 83,000...
Andretti Company has a single product called a Dak. The company normally produces and sells 83,000 Daks each year at a selling price of $64 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 3.20 Fixed manufacturing overhead 7.00 ($581,000 total) Variable selling expenses 2.70 Fixed selling expenses 4.00 ($332,000 total) Total cost per unit $ 35.40 4. Due to a strike in its supplier’s...
Andretti Company has a single product called a Dak. The company normally produces and sells 86,000...
Andretti Company has a single product called a Dak. The company normally produces and sells 86,000 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 12.00 Variable manufacturing overhead 3.50 Fixed manufacturing overhead 10.00 ($860,000 total) Variable selling expenses 2.70 Fixed selling expenses 3.50 ($301,000 total) Total cost per unit $ 39.20 A number of questions relating to the production...
Andretti Company has a single product called a Dak. The company normally produces and sells 83,000...
Andretti Company has a single product called a Dak. The company normally produces and sells 83,000 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 $ 7.50 Direct labor 9.00 Variable manufacturing overhead 1.90 Fixed manufacturing overhead 4.00 ($332,000 total) Variable selling expenses 4.70 Fixed selling expenses 4.00 ($332,000 total) Total cost per unit $ 31.10 A number of questions relating to the production...
ADVERTISEMENT
Need Online Homework Help?

Get Answers For Free
Most questions answered within 1 hours.

Ask a Question
ADVERTISEMENT