10 Check my work Problem 12-18 Relevant Cost Analysis in a Variety of Situations
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10 Check my work Problem 12-18 Relevant Cost Analysis in a Variety of Situations [LO12-2, LO12-3, LO12-4] Andretti Company has a single product called a Dak. The company normally produces and sells 87,000 Daks each year at a selling price of $42 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 Total cost per unit $ 9.58 18.88 3.58 ook 4.08 ($348,880 total) rint 1.78 .se ($478,580 total) 34.28 A number of questions relating to the production and sale of Daks follow. Each question Is Independent Requirec 1-a. Assume that Andretti Company has sufficient capacity to produce 108,750 Daks each year without any increase in fixed manufacturing overhead costs. The company could increase its unit sales by 25% above the present 87,000 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? 1-b. Would the additional Investment be Justified? 2 Assume agaln that Andrettl Company has sufficient capacity to produce 108,750 Daks each year. A customer In a foreign market wants to purchase 21.750 Daks. If Andretti accepts this order it would have to pay Import dutiles on the Daks of $2.70 per unit and an additional $13,050 for permits and licenses. The only selling costs that would be assoclated with the order would be $160 per unit shlpping cost. What is the break-even price per unit on this order? 3. The company has 800 Daks on hand that have some Irregularities and are therefore consldered to be "seconds." Due to the Irregularities, It will be Impossible to sell these unlts 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. Andrettil Company has enough material on hand to operate at 25% of normal levels for the two-month period. As an alternative, Andretti could close its plant down entirely for the two months. If the plant were closed, fixed manufacturing overhead costs would continue at 35% of their normal level during the two-month period and the fixed selling expenses would be reduced by 20% during the two-month period. a. How much total contribution margin will Andrettl forgo if it closes the plant for two months? b. How much total fixed cost wll the company avold if It closes the plant for two months? C. What Is the financial advantage (disadvantage) of closing the plant for the two-month perlod? d. Should Andretti close the plant for two months? 5. An outside manufacturer has offered to produce 87,000 Daks and shlp them directly to Andretti's customers. If Andretti Company accepts this offer, the faclities 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 Andrettil's avoldable cost per unit that it should compare to the price quoted by the outside manufacturer? Complete this question by entering your answers in the tabs below Req 1A Req 1B Req 2 Req 3 Req 4A to 4CReq 4D Req 5 Assume that Andretti Company has sufficient capacity to produce 108,750 Daks each year without any increa manufacturing overhead costs. The company could increase its unit sales by 25% above the present 87,000 . it were willing to increase the fixed selling expenses by $130,000. What is the financial advantage (disadvant an additional $130,000 in fixed selling expenses?Explanation / Answer
Per unit data Selling price 42 Less: Variable costs: Direct materials 9.5 Direct Labor 10 VMOH 3.5 VSExp. 1.7 Total 24.7 Marginal contribution/unit sold 17.3 1.a. Additional units 87000*25%= 21750 So, additional contribution 21750*17.3= 376275 Increased selling expenses 130000 Net financial advantage 246275 1.b. Yes. As it gives positive revenues to meet the regular fixed costs even after meeting the additional selling expenses of 130000 2 21750 Daks-- foreign order Relevant costs: Direct materials 9.5 Direct Labor 10 VMOH 3.5 Import duty 2.7 Permits & licenses (13050/21750) 0.6 Shipping costs 1.6 Total relevant cost/unit 27.9 The already existing fixed costs are going to be incurred ,irrespective of this order. They are irrelevant to this (BEP) decision-making. So, the break-even price /unit for this foreign order= $ 27.9 --- (when the selling price breaks-even--no loss,no profit--- with the relevant costs that are incurred . 3. Minimum selling price for seconds Relevant costs Direct materials 9.5 Direct Labor 10 VMOH 3.5 Minimum selling price 23 4. a. Total contribution margin foregone in 2 months= 87000 daks /12 mths*2 mths.* $ 17.3= 250850 b. Fixed costs that can be avoided= Fixed Mfg. Ohs $ 348000/12*2*(1-35%)= 37700 Fixed selling Ohs $ 478500/12*2*20%= 15950 Total avoidable fixed expenses 53650 4.c. 25% normal level Decision to Close Marginal contribution /unit 17.3 0 Units produced & sold 3625 0 Total contribution for 62712.5 0 Less:Relevant Fixed costs that cannot be avoided,in this decision 53650 Add:Relevant Fixed costs that can be avoided,with this decision 53650 Advantage 9062.5 53650 So, net financial advantage of closing for 2 months = 53650-9062.50= $ 44587.50 d. Yes . As it is financially beneficial 5 Avoidable costs Relevant costs: Relevant costs: Direct materials 0 Direct materials 9.5 9.5 Direct Labor 0 Direct Labor 10 10 VMOH 0 VMOH 3.5 3.5 VSExp.(2/3*1.7) 1.13 VSExp. 1.7 0.57 FMOH(1-30%) 2.8 FMOH 4 1.2 Total 3.93 28.70 24.77 So, per unit aviodable cost = $ 24.77
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