Andretti Company has a single product called a Dak The compa

Andretti Company has a single product called a Dak. The company normally produces and sells 90,000 Daks each year at a selling price of $48 per unit. The company\'s unit costs at this level of activity are given below: $ 7.50 10.00 3.00 Direct materials Direct labor Variable manufacturing overhead Fixed manufacturing overhead Variable selling expenses Fixed selling expenses Total cost per unit 9.00 ($810,000 total) 3.70 4.50 ($405,000 total) $ 37.70 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 117,000 Daks each year without any increase in fixed manufacturing overhead costs. The company could increase its sales by 30% above the present 90,000 units cach year if it were willing to increase the fixed selling expenses by $120,000. Calculate the incremental net operating income. (Round your answers to the nearest whole number.) Increased sales in units Contribution margin per unit Incremental contribution margin Less added foxed selling expense Incremental net operating income 1-b. Would the increased fixed selling expenses be justified? O No O Yes 2. Assume again that Andretti Company has sufficient capacity to produce 117,000 Daks each year. A customer in a foreign market wants to purchase 27,000 Daks. Import duties on the Daks would be $2.70 per unit, and costs for permits and licenses would be $16,200. The only selling costs that would be associated with the order would be $2.20 per unit shipping cost. Compute the per unit break-even price on this order. (Round your answers to 2 decimal places.) Variable manufacturing cost per unit Import duties per unit Permits and licenses Shipping cost per unit Break-even price per unit

Solution

Solution:

Question is related on the decision making based on relevant cost.

Relevant Cost is the cost which will be incurred in future and different under each alternative course of action. The following costs are considered as relevant cost:

- Direct material cost

- Direct labor cost

- Variable manufacturing overhead

- Variable Cost of Goods Sold

- Variable selling and administrative expenses

The above costs are the variable cost which will vary with the production volume. Hence these costs have both the characteristic of relevant cost i.e. it is a future cost and different under each alternative course of action.

Sometimes there are some fixed costs which will directly associated with the production or increase production units and have characteristics of relevant cost. i.e. future cost and different under each alternative course of action. In the given question the fixed selling expenses $120,000 is a relevant cost since it is a future cost i.e. it will incur if company increase its sales by 30%.

Irrelevant cost is the costs which do not play any role in decision making. Irrelevant Cost is the SUNK Cost which has already been incurred and does not change whether company accept or reject the order. Hence it is treated as IRRELEVANT COST.

Part 1-a) Calculation of Incremental Net Operating Income

Increased sales in units (90,000 Units x 30%)

27000

Contribution Margin per unit (Refer Note 1)

$23.80

Incremental Contribution Margin

$642,600

Less: added fixed selling expense

-$120,000

Incremental net operating income

$522,600

Note 1 – Calculation of Contribution Margin Per Unit

$ per unit

Unit Selling Price

$48.0

Less: Per Unit Total Variable Cost

Direct materials

$7.50

Direct labor

$10.00

Variable Manufacturing overhead

$3.00

Variable selling expenses

$3.70

Unit Total Variable Cost

$24.20

Contribution Margin Per Unit

$23.80

Incremental Sales in Units = 27,000 Units

Contribution Margin per Unit = $23.80

Incremental Contribution Margin = 27,000 Units x $23.80 = $642,600

Part 1-b) – Yes, the increased fixed selling expenses would be justified since there will be an increase in operating profit.

Part 2 --- Calculation of Per Unit Break Even Price on this order

Variable Manufacturing Cost per Unit (Refer Note 2)

$20.50

Import duties per unit

$2.70

Permit and Licenses (Total $16,200 / Units 27,000)

$0.60

Shipping cost per unit

$2.20

Break Even Price per unit

$26.00

Note 2 – Calculation of Variable Manufacturing cost per unit

Variable Manufacturing Cost is the cost incurred on making of product. It includes direct materials, direct labors and variable manufacturing overhead.

Variable Manufacturing Cost per Unit = Direct materials $7.50 + Direct Labor $10 + Variable Manufacturing Overhead $3 = $20.50

Part 3 – Calculation of Minimum Selling Price Per Unit

Minimum selling price is the price equals to the relevant cost per unit associated with the product.

Relevant Cost Per Unit

$ per unit

Direct materials

$7.50

Direct labor

$10.00

Variable Manufacturing overhead

$3.00

Variable selling expenses

$3.70

Relevant Cost Per Unit

$24.20

Hence, the Minimum Selling Price per Unit = $24.20

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Pls ask separate question for remaining parts.

Increased sales in units (90,000 Units x 30%)	27000
Contribution Margin per unit (Refer Note 1)	$23.80
Incremental Contribution Margin	$642,600
Less: added fixed selling expense	-$120,000
Incremental net operating income	$522,600