11. Andretti Company has a sin
11. Andretti Company has a single product called a Dak. Thecompany normally produces and sells 85,000 Daks each year at aselling price of $54 per unit. The company’s unit costs at thislevel of activity are given below: Direct materials $ 7.50 Directlabor 12.00 Variable manufacturing overhead 2.40 Fixedmanufacturing overhead 7.00 ($595,000 total) Variable sellingexpenses 4.70 Fixed selling expenses 3.00 ($255,000 total) Totalcost per unit $ 36.60 A number of questions relating to theproduction and sale of Daks follow. Each question is independent.Required: 1-a. Assume that Andretti Company has sufficient capacityto produce 114,750 Daks each year without any increase in fixedmanufacturing overhead costs. The company could increase its unitsales by 35% above the present 85,000 units each year if it werewilling to increase the fixed selling expenses by $110,000. What isthe financial advantage (disadvantage) of investing an additional$110,000 in fixed selling expenses? 1-b. Would the additionalinvestment be justified? 2. Assume again that Andretti Company hassufficient capacity to produce 114,750 Daks each year. A customerin a foreign market wants to purchase 29,750 Daks. If Andrettiaccepts this order it would have to pay import duties on the Daksof $3.70 per unit and an additional $23,800 for permits andlicenses. The only selling costs that would be associated with theorder would be $2.30 per unit shipping cost. What is the break-evenprice per unit on this order? 3. The company has 500 Daks on handthat have some irregularities and are therefore considered to be”seconds.” Due to the irregularities, it will be impossible to sellthese units at the normal price through regular distributionchannels. What is the unit cost figure that is relevant for settinga minimum selling price? 4. Due to a strike in its supplier’splant, Andretti Company is unable to purchase more material for theproduction of Daks. The strike is expected to last for two months.Andretti Company has enough material on hand to operate at 25% ofnormal levels for the two-month period. As an alternative, Andretticould close its plant down entirely for the two months. If theplant were closed, fixed manufacturing overhead costs wouldcontinue at 40% of their normal level during the two-month periodand the fixed selling expenses would be reduced by 20% during thetwo-month period. a. How much total contribution margin willAndretti forgo if it closes the plant for two months? b. How muchtotal fixed cost will the company avoid if it closes the plant fortwo months? c. What is the financial advantage (disadvantage) ofclosing the plant for the two-month period? d. Should Andretticlose the plant for two months? 5. An outside manufacturer hasoffered to produce 85,000 Daks and ship them directly to Andretti’scustomers. If Andretti Company accepts this offer, the facilitiesthat it uses to produce Daks would be idle; however, fixedmanufacturing overhead costs would be reduced by 30%. Because theoutside manufacturer would pay for all shipping costs, the variableselling expenses would be only two-thirds of their present amount.What is Andretti’s avoidable cost per unit that it should compareto the price quoted by the outside manufacturer?
Answer:
| Solution 1-a: | ||
| Computation of Contribution Margin per unit | ||
| Selling price per unit | 54.00 | |
| Less: variable expenses: | ||
| Direct materials | 7.50 | |
| Direct labor | 12.00 | |
| Variable manufacturing Overhead | 2.40 | |
| Variable selling expense | 4.70 | 26.60 |
| Contribution margin per unit | 27.40 | |
| Increased Sales In units (85000*35%) | 29750 | |
| Contribution margin per unit | $27.40 | |
| Incremental Contribution margin | $815,150.00 | |
| Less: Added Fixed selling expense | $110,000.00 | |
| Incremental Net Operating Income | $705,150.00 | |
| Solution 1-b: | ||
| Yes, Additional investment would be justified. | ||
| Solution 2: | ||
| Variable Manufacturing Cost per unit | $21.90 | |
| Import Duties per unit | $3.70 | |
| Permits and licenses ($23,800/29750) | $0.80 | |
| Shipping cost per unit | $2.30 | |
| Break even price per unit | $28.70 | |
| Solution 3: | ||
| Relevant unit cost (Variable selling expesne) | $4.70 | |
| Solution 4: (a, b, c, d) | ||
| Units for two months (85000*25%*2/12) | 3542 | |
| Contribution margin per unit | $27.40 | |
| Contribution margin forgone (a) | $97,042 | |
| Fixed costs: | ||
| Fixed manufacturing overhead cost (595000*2/12*60%) | $59,500 | |
| Fixed selling cost ($255,000*2/12*20%) | $8,500 | |
| Total Fixed cost Avoidance (b) | $68,000 | |
| Net Advantage (disadvantage) of closing the plant (c )=b-a | -$29,042 | |
| Should Andretti close the plant for Two months?(d) | No | |
| Solution 5: | ||
| Variable manufacturing cost | 21.90 | |
| Fixed manufacturing overhead cost ($7*30%) | 2.10 | |
| Variable selling expense ($4.70*1/3) | 1.57 | |
| Total Costs Avoided | 25.57 |
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