Problem 11-18 Relevant Cost Analysis in a Variety of Situations[LO11-2, LO11-3, LO11-4]

Andretti Company has a single product called a Dak. The companynormally produces and sells 121,000 Daks each year at a sellingprice of $44 per unit. The company’s unit costs at this level ofactivity are given below:

Direct materials	$	8.50
Direct labor		10.00
Variable manufacturing overhead		3.60
Fixed manufacturing overhead		6.00	($726,000 total)
Variable selling expenses		3.70
Fixed selling expenses		4.50	($544,500 total)
Total cost per unit	$	36.30

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

Required:

1-a. Assume that Andretti Company has sufficient capacity toproduce 163,350 Daks each year without any increase in fixedmanufacturing overhead costs. The company could increase its unitsales by 35% above the present 121,000 units each year if it werewilling to increase the fixed selling expenses by $140,000. What isthe financial advantage (disadvantage) of investing an additional$140,000 in fixed selling expenses?

1-b. Would the additional investment be justified?

2. Assume again that Andretti Company has sufficient capacity toproduce 163,350 Daks each year. A customer in a foreign marketwants to purchase 42,350 Daks. If Andretti accepts this order itwould have to pay import duties on the Daks of $2.70 per unit andan additional $25,410 for permits and licenses. The only sellingcosts that would be associated with the order would be $2.30 perunit shipping cost. What is the break-even price per unit on thisorder?

3. The company has 400 Daks on hand that have someirregularities and are therefore considered to be "seconds." Due tothe irregularities, it will be impossible to sell these units atthe normal price through regular distribution channels. What is theunit cost figure that is relevant for setting a minimum sellingprice?

4. Due to a strike in its supplier’s plant, Andretti Company isunable to purchase more material for the production of Daks. Thestrike is expected to last for two months. Andretti Company hasenough material on hand to operate at 25% of normal levels for thetwo-month period. As an alternative, Andretti could close its plantdown entirely for the two months. If the plant were closed, fixedmanufacturing overhead costs would continue at 35% of their normallevel during the two-month period and the fixed selling expenseswould be reduced by 20% during the two-month period.

a. How much total contribution margin will Andretti forgo if itcloses the plant for two months?

b. How much total fixed cost will the company avoid if it closesthe plant for two months?

c. What is the financial advantage (disadvantage) of closing theplant for the two-month period?

d. Should Andretti close the plant for two months?

5. An outside manufacturer has offered to produce 121,000 Daksand ship them directly to Andretti’s customers. If Andretti Companyaccepts this offer, the facilities that it uses to produce Dakswould be idle; however, fixed manufacturing overhead costs would bereduced by 30%. Because the outside manufacturer would pay for allshipping costs, the variable selling expenses would be onlytwo-thirds of their present amount. What is Andretti’s avoidablecost per unit that it should compare to the price quoted by theoutside manufacturer?