A number of questions relating to the production and sale of Daks follow.
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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![Problem 6-18 (Algo) Relevant Cost Analysis in a Variety of Situations [LO6-2, LO6-3, LO6-4]
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 $60 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
$ 7.50
8.00
2.90
5.00 ($435,000 total)
2.70
2.50 ($217,500 total)
$28.60
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 113,100 Daks each year without any increase in fixed.
manufacturing overhead costs. The company could increase its unit sales by 30% above the present 87,000 units each year if it were
willing to increase the fixed selling expenses by $110,000. What is the financial advantage (disadvantage) of investing an additional
$110,000 in fixed selling expenses?
1-b. Would the additional investment be justified?
2. Assume again that Andretti Company has sufficient capacity to produce 113,100 Daks each year. A customer in a foreign market
wants to purchase 26,100 Daks. If Andretti accepts this order it would have to pay import duties on the Daks of $3.70 per unit and an
additional $20,880 for permits and licenses. The only selling costs that would be associated with the order would be $2.40 per unit
shipping 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 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 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. Andretti 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 Andretti forgo if it closes the plant for two months?
b. How much total fixed cost will the company avoid if it closes the plant for two months?
c. What is the financial advantage (disadvantage) of closing the plant for the two-month period?
d. Should Andretti close the plant for two months?](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2Fb0c53c3c-d25b-4f46-ae7f-d9559756d1d4%2F486bd230-a766-4ad3-8ce0-a7c38e062dcd%2Febdig5b_processed.jpeg&w=3840&q=75)
Transcribed Image Text:Problem 6-18 (Algo) Relevant Cost Analysis in a Variety of Situations [LO6-2, LO6-3, LO6-4]
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 $60 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
$ 7.50
8.00
2.90
5.00 ($435,000 total)
2.70
2.50 ($217,500 total)
$28.60
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 113,100 Daks each year without any increase in fixed.
manufacturing overhead costs. The company could increase its unit sales by 30% above the present 87,000 units each year if it were
willing to increase the fixed selling expenses by $110,000. What is the financial advantage (disadvantage) of investing an additional
$110,000 in fixed selling expenses?
1-b. Would the additional investment be justified?
2. Assume again that Andretti Company has sufficient capacity to produce 113,100 Daks each year. A customer in a foreign market
wants to purchase 26,100 Daks. If Andretti accepts this order it would have to pay import duties on the Daks of $3.70 per unit and an
additional $20,880 for permits and licenses. The only selling costs that would be associated with the order would be $2.40 per unit
shipping 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 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 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. Andretti 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 Andretti forgo if it closes the plant for two months?
b. How much total fixed cost will the company avoid if it closes the plant for two months?
c. What is the financial advantage (disadvantage) of closing the plant for the two-month period?
d. Should Andretti close the plant for two months?
Transcribed Image Text:Complete this question by entering your answers in the tabs below.
Req 1A
Req 18
Answer is complete but not entirely correct.
Reg 2
Financial advantage
Req 3
906,290 X
Req 4A to 4C
Req 4D
Assume that Andretti Company has sufficient capacity to produce 113,100 Daks each year without any increase in fixed
manufacturing overhead costs. The company could increase its unit sales by 30% above the present 87,000 units each year if
it were willing to increase the fixed selling expenses by $110,000. What is the financial advantage (disadvantage) of investing
an additional $110,000 in fixed selling expenses?
Req 5
Req 1B >
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