Answered Essay: Andretti Company has a single product called a Dak. The company normally produces and sells 60,000 Daks each year at a selling price of $

Andretti Company has a single product called a Dak. The company normally produces and sells 60,000 Daks each year at a selling price of $32 per unit. The companys unit costs at this level of activity are given below: $ 10.00 Direct materials Direct labor Variable manufacturing overhead Fixed manufacturing overhead Variable selling expenses Fixed selling expenses 4.50 2.30 5.00 ($300,000 total) 1.20 3.50 ($210,000 total) Total cost per unit $ 26.50 A number of questions relating to the production and sale of Daks follow. Each question is independent.

Andretti Company has a single product called a Dak. The company normally produces and sells 60,000 Daks each year at a selling price of $32 per unit. The company’s unit costs at this level of activity are given below: $ 10.00 Direct materials Direct labor Variable manufacturing overhead Fixed manufacturing overhead Variable selling expenses Fixed selling expenses 4.50 2.30 5.00 ($300,000 total) 1.20 3.50 ($210,000 total) Total cost per unit $ 26.50 A number of questions relating to the production and sale of Daks follow. Each question is independent.

Expert Answer

 

Answer to Part 1-a.

Contribution Margin per unit = Selling Price per unit – Variable Cost per unit
Variable Cost per unit = $10 + $4.50 + $2.30 + $1.20
Variable Cost per unit = $18

Contribution Margin per unit = $32 – $18 = $14

Increased Sales in units (60,000 * 25%) 15,000
Contribution Margin per unit $14
Incremental Contribution Margin $210,000
Less: Added Fixed Selling Expense ($80,000)
Incremental Net Operating Income 130,000

Answer to Part 1-b.

Yes, the added Fixed Selling Expenses are justified, as it is increasing Net Operating Income by $130,000.

Answer to Part 2.

Variable Manufacturing Cost per unit

($10 + $4.50 + $2.30)

$16.80
Import Duties per unit $1.70
Permits and Licenses

(9,000 / 20,000)

$0.45
Shipping Cost per unit $3.20
Break Even Price per unit $22.15

Answer to Part 3.

Relevant Unit Cost per unit is $1.20 which is the Variable Selling Expenses, as the cost incurred have already been incurred in producing the irregular units and fixed cost will remain same whether the units was produced or not. Therefore, the relevant cost will be the cost incurred to sell these units which is Variable Selling Expense per unit.

Answer to Part 4.

If Company is operating at 30% capacity for 2 months, then the
Units produced = 60,000 * 2/12 * 30% = 3,000

Contribution Margin Lost

(3,000 * $14)

($42,000)
Fixed Cost:

Fixed Manufacturing Overhead Cost

(300,000 * 2/12 * 40%)

Fixed Selling Cost

(210,000 * 2/12 * 20%)

20,000

7,000

Net Disadvantage of Closing the plant $15,000
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