2 Andretti Company Required 15 Andretti Company has a single

2. Andretti Company

Required 1-5:

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 $46 per unit. The company\'s unit costs at this level of activity are given belov Direct materials Direct labor Variable manufacturing overhead Fixed nanufacturing overhead Variable selling expenses Fixed selling expenses Total cost per unit $ 7.50 10.00 3.00 4.00 ($332,000 total) 2.70 4.50 ($373,500 total) $31.70 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 112,050 Daks each year without any increase in fixecd manufacturing overhead costs. The company could increase its unit sales by 35% above the present 83,000 units each year if it were willing to increase the fixed selling expenses by $130,000. What is the financial advantage (disadvantage) of investing an additional $130,000 in fixed selling expenses? 2. Assume again that Andretti Company has sufficient capacity to produce 112,050 Daks each year. A customer in a foreign mark wants to purchase 29,050 Daks. If Andretti accepts this order it would have to pay import duties on the Daks of $3.70 per unit and an additional $26,145 for permits and licenses. The only selling costs that would be associated with the order would be $2.40 per unit shipping cost. What is the break-even price per unit on this order? 3. The company has 900 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 aterial on hand to operate at 25% of ormal levels forthe bio-month period. As an alternative, Andretti could close its plant down entirely for the two months. If the plant were closed, fixed manufacturing reduced by 20% during the two-month period. 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 83,000 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?

Solution

3. The relevant cost of the Units that are considered to be second is the variable selling expense . Direct Material , Direct Labour, and Variable Manufacturign Overhead cost are already incurred ;it implies all the three cost are sunk cost. Thus relevant cost per Unit $2.70

Note: As per chegg Policy only 4 part can be solved.

Solution 1a:

Variable cost per unit = $7.50 + $10 + $3 + $2.70 = $23.20

Selling price per unit = $46

Contribution per unit = $46 - $23.20 = $22.80

Additional sales that company can do = 83000*35% = 29050

Additional contribution that company can earn = 29050 * $22.80 = $6,62,340

Additional fixed selling expenses to be incurred = $130,000

Financial advantage of investing additonal fixed selling expense = $6,62,340 - $130,000 = $5,32,340

Solution 1b:

As there is additonal income of $5,32,340 for additional sales, hence additional investment is justified.

Solution 2:

If additional units to be sold to foreign customer then variable cost per unit = Variable cost as calculted abovee + Import duty + Selling cost per unit

= $23.20+ $3.70 + $2.40 = $29.30

Additional fixed cost = $26145

Contribution per unit for break even = Additional fixed cost / Additional units = $26145/ 29050 = $0.90 per unit

Therefore required selling price to break even = Variable cost per unit + Required contribution per unit

= $29.30 + $0.90 = $30.20 per unit

3. The relevant cost of the Units that are considered to be second is the variable selling expense . Direct Material , Direct Labour, and Variable Manufacturign Overhead cost are already incurred ;it implies all the three cost are sunk cost. Thus relevant cost per Unit $2.70 Note: As per chegg Policy only 4 part can be solved.