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 $56 per unit. The company’s unit costs at this level of activity are given below: Direct materials $ 7.50 Direct labor 8.00 Variable manufacturing overhead 3.70 Fixed manufacturing overhead 6.00 ($486,000 total) Variable selling expenses 2.70 Fixed selling expenses 3.50 ($283,500 total) Total cost per unit $ 31.40 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 105,300 Daks each year without any increase in fixed manufacturing overhead costs. The company could increase its unit sales by 30% above the present 81,000 units each year if it were willing to increase the fixed selling expenses by $120,000. What is the financial advantage (disadvantage) of investing an additional $120,000 in fixed selling expenses? 1-b. Would the additional investment be justified?

Answer 1

Increase in unit sales	24300	=81000*30%
1a
	Per unit	Total 24300 units
Incremental revenue	56.00	1360800
Incremental costs:
Variable costs:
Direct materials	7.50	182250
Direct labor	8.00	194400
Variable manufacturing overhead	3.70	89910
Variable selling expenses	2.70	65610
Total variable cost	19.20	532170
Fixed costs:
Increase in fixed selling expenses		120000
Total Incremental costs		652170
Incremental net operating income(loss)		708630
Financial advantage = 708630
1b
Yes, the additional investment is justified