Problem 10-18A Relevant Cost Analysis in a Variety of Situations [L010-2, LO10-3

Question

Problem 10-18A Relevant Cost Analysis in a Variety of Situations [L010-2, LO10-3, LO10-4] Andretti Company has a single product called a Dak. The company normally produces and sells 84,000 Daks each year at a selling price of $50 per unit. The company's unit costs at this level of activity are given below Direct materials Direct labor Variable manufacturing overhead Fixed manufacturing overhead Variable selling expenses Fixed selling expenses $ 9.50 11.00 3.50 7.00 (5588,000 total) 4.70 3.50 ($294,000 total) Total cost per unit $39.20 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 105,000 Daks each year without any increase in fixed manufacturing overhead costs. The company could increase its sales by 25% above the present 84,000 units each year if it were willing to increase the fixed selling expenses by $120,000. Calculate the incremental net operating income. (Round all dollar amounts to 2 decimal places.) Increased sales in units Contribution margin per unit Incremental contribution margin Less added fixed selling expense Incremental net operating income 0.00

Explanation / Answer

1(a) Incremental sales in units 21000 Contribution per unit 21.3 (50-9.5-11-3.5-4.7) Incremental Contribution 447300 Less: added fixed selling exp 120000 Incremental net operating income 327300 1(b) Yes, due to extra selling exp, company earning incremantal contribution of $327300 2 Variable Manufacturing cost per unit 28.7 Import duties 3.7 Permit and licenses 0.9 `(18900/21000) Shipping Cost 2.7 Break even price per unit 36 3 Relevant unit cost 28.7 * Varaible cost including selling exp 4 Contribution Lost 447300 (21000*21.3) (84000*25% = 21000 units Fixed Manufacturing O/H 382200 (588000*.65) Fixed Selling cost 58800 (294000*.2) Net disadvantage of closing the plant 6300

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