I need Help with NUMBER 4 Andretti Company has a single product called a Dak. Th

Question

I need Help with NUMBER 4

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: Direct materials $ 10.00 Direct labor 4.50 Variable manufacturing overhead 2.30 Fixed manufacturing overhead 5.00 ($300,000 total) Variable selling expenses 1.20 Fixed selling expenses 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. Required:

1-a. Assume that Andretti Company has sufficient capacity to produce 90,000 Daks each year without any increase in fixed manufacturing overhead costs. The company could increase its sales by 25% above the present 60,000 units each year if it were willing to increase the fixed selling expenses by $80,000. Calculate the incremental net operating income.

1-b. Would the increased fixed selling expenses be justified? Yes

2. Assume again that Andretti Company has sufficient capacity to produce 90,000 Daks each year. A customer in a foreign market wants to purchase 20,000 Daks. Import duties on the Daks would be $1.70 per unit, and costs for permits and licenses would be $9,000. The only selling costs that would be associated with the order would be $3.20 per unit shipping cost. Compute the per unit break-even price on this order. (Round your answers to 2 decimal places.)

3. The company has 1,000 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 unit cost figure is relevant for setting a minimum selling price? (Round your answer to 2 decimal places.)

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 material on hand to operate at 30% 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 60% of their normal level during the two-month period and the fixed selling expenses would be reduced by 20%. What would be the impact on profits of closing the plant for the two-month period? (Any losses should be indicated by a minus sign.)

Explanation / Answer

4. See if Andretti company does not close the plant for these intrupted period of two months then it will earn the 30% contribution of its normal level which will be :

Contribution per unit : Sales - Variable cost i.e. 32-10-4.5-2.3-1.2 = $ 14 per unit right

So contribution for 30 % level will be 60000*30% = 18000 Units * $ 14 = $ 420000

But for saving this contribution the company has to expand whole amount of fixed expenditure i.e Fixed manufacturing overhead & Fixed selling expenses viz $ 510000 (300000+210000).

So its net loss will be 420000-510000 = $90000

On the other hand if the company decided to shut down then

Fixed manufacturing overhead = 60%*300000 = $180000

Fixed Selling Expenses = 80% * 210000 = $ 168000

So its loss will be $ 348000 (168000+180000)

So net impact on profit of shutting down the plant will be 90000-348000 = - $ 258000.

I hope it covers your query . Thanks

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