Reference no: EM132922278

Question - 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 follow:

Direct materials 10.00

Direct labour 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. Consider each question separately.

Required -

1. Assume that Andretti Company has sufficient capacity to produce 90,000 Daks every year without any increase in fixed manufacturing overhead costs. The company currently produces and sells 60,000 units each year. However, it plans to increase the fixed selling expenses by $70,000 in order to increase sales. By how much should sales increase in order to justify the additional $70,000? Please compute the percentage increase in sales.

2. Assume again that Andretti Company has sufficient capacity to produce 90,000 Daks every year. A cus-tomer 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 licences would be $9,000. The only selling costs that would be associated with the order would be $3.20 per unit shipping cost. You have been asked by the president to compute the per-unit break-even price on this order.

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?

4. Due to a strike in its supplier's plant, Andretti Company is unable to purchase more materials for the production of Daks. The strike is expected to last for two months. Andretti Company has enough materials on hand to continue 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, all fixed costs would continue at 50% of their normal level during the two-month period. What would be the dollar advantage or disadvantage of closing the plant for the two-month period?

5. An outside manufacturer has offered to produce Daks for Andretti Company and to ship them directly to Andretti's customers. If Andretti Company accepts this offer, the facilities that it uses to produce Daks would be idle; however, fixed overhead costs would be reduced by 75% of their present level. Since the outside manufacturer would pay all the costs of shipping, the variable selling costs would be only two-thirds of their present amount. Compute the unit cost figure relevant for comparison to whatever quoted price is received from the outside manufacturer.