Question

Andretti Company has a single product called a Dak. The company normally produces and sells 88,000 Daks each year at a selling price of $60 per unit . The companyâs unit costs at this level of activity are given below :
Direct materials $7.50
Direct labor 10.00
Variable manufacturing overhead 1.90
Fixed manufacturing overhead 6.00"
Variable selling expenses 2.70
Fixed selling expenses 3.00 ($264,000 total)
Total cost per unit $35.00

A number of questions relating to the production and sale of Daks follow. Each question is independent.

Required:

a. Assume that Andretti Company has sufficient capacity to produce 114,400 Daks each year without any increase in fixed manufacturing overhead costs. The company could increase its unit sales by 30% above the present 88,000 units each year if it were willing to increase the fixed selling expenses by $140,000. What is the financial advantage (disadvantage) of investing an additional $140,000 in fixed selling expenses?

b. Would the additional investment be justified?

c. Assume again that Andretti Company has sufficient capacity to produce 114,400 Daks each year. A customer in a foreign market wants to purchase 26,400 Daks. If Andretti accepts this order it would have to pay import duties on the Daks of $1.70 per unit and an additional $18,480 for permits and licenses. The only selling costs that would be associated with the order would be $2.00 per unit shipping cost. What is the break-even price per unit on this order?

Answer 1

Answer:

1a. Incremental net income $ 860,560

1b. Yes, the additional investment will be justified because the cost which is justified as incremental contribution is more than enough to cover for the incremental fixed selling expenses

1c. Breakeven cost for order $ 23.8

Explanation:

Calculation for the contribution margin per unit

Selling price per unit $ 60

Variable cost per unit as

Direct materials 7.50

Direct labor 10.00

Variable manufacturing overhead 1.90

Variable selling expenses 2.70

Total variable cost per unit 22.1

Contribution margin per unit $ 37.9

(60-22.1)

1a. Computation for the incremental operating income

Incremental contribution margin$ 1,000,560

(26,400 units*37.9)

Incremental fixed costs$ 140,000

Incremental net income $ 860,560

Incremental units = 114,400-88,000 = 26,400 units

1b. Yes, the additional investment will be justified because the cost which is justified as incremental contribution is more than enough to cover for the incremental fixed selling expenses.

1c. The breakeven price per unit will not include current fixed costs because the order will be only for the incremental costs of the units

Variable cost per unit as

Direct materials 7.50

Direct labor 10.00

Variable manufacturing overhead 1.90

Variable selling expenses (i.e. shipping cost only) 2

Import duties 1.70

Permits and licenses (18,480/26,400) 0.7

Breakeven cost for order $ 23.8