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
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 companys unit costs at this level of activity are given below:
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|
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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.
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1-b. Would the increased fixed selling expenses be justified?
| Yes |
| No |
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