Question

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 and sale of Daks follow. Each question is independent.

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 40% 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?

Answer 1

Solution 4:

Computation of Contribution Margin per unit
Selling price per unit		62.00
Less: variable expenses:
Direct materials	7.50
Direct labor	12.00
Variable manufacturing Overhead	3.50
Variable selling expense	2.70	25.70
Contribution margin per unit		36.30

Units for two months (86000*25%*2/12)	3583
Contribution margin per unit	$36.30
Contribution margin forgone (a)	$130,075
Fixed costs:
Fixed manufacturing overhead cost (860000*2/12*60%)	$86,000
Fixed selling cost ($301,000*2/12*20%)	$10,033
Total Fixed cost Avoidance (b)	$96,033
Net Advantage (disadvantage) of closing the plant (c )= b-a	-$34,042
Should Andretti close the plant for Two months? (d)	No