Problem 10-18A Relevant Cost Analysis in a Variety of Situations [LO10-2, LO10-3, LO10-4]

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 $44 per unit. The companys unit costs at this level of activity are given below:

Direct materials	$	8.50
Direct labor		12.00
Variable manufacturing overhead		3.40
Fixed manufacturing overhead		9.00	($783,000 total)
Variable selling expenses		4.70
Fixed selling expenses		3.50	($304,500 total)
Total cost per unit	$	41.10

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 117,450 Daks each year without any increase in fixed manufacturing overhead costs. The company could increase its sales by 35% above the present 87,000 units each year if it were willing to increase the fixed selling expenses by $110,000. Calculate the incremental net operating income. (Round all dollar amounts to 2 decimal places.)

1-b.

Would the increased fixed selling expenses be justified?

	Yes
	No

2.

Assume again that Andretti Company has sufficient capacity to produce 117,450 Daks each year. A customer in a foreign market wants to purchase 30,450 Daks. Import duties on the Daks would be $2.70 per unit, and costs for permits and licenses would be $15,225. The only selling costs that would be associated with the order would be $2.40 per unit shipping cost. Compute the per unit break-even price on this order. (Round your answers to 2 decimal places.)

3.	The company has 400 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? (Round your answer to 2 decimal places.)

4.

Due to a strike in its suppliers 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 30% of their normal level during the two-month period and the fixed selling expenses would be reduced by 20%. What would be the impact on profits of closing the plant for the two-month period? (Enter losses/reductions with a minus sign. Round intermediate calculations to 2 decimal places. Round number of units calculation and final answers to nearest whole number.)

5.

An outside manufacturer has offered to produce Daks and ship them directly to Andrettis customers. If Andretti Company accepts this offer, the facilities that it uses to produce Daks would be idle; however, fixed manufacturing overhead costs would be reduced by 75%. Because the outside manufacturer would pay for all shipping costs, the variable selling expenses would be only two-thirds of their present amount. Compute the unit cost that is relevant for comparison to the price quoted by the outside manufacturer. (Do not round intermediate calculations. Round your answer to 2 decimal places.)

Problem 10-18A Relevant Cost Analysis in a Variety of Situations [LO10-2, LO10-3, LO10-4] 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 $44 per unit. The companys unit costs at this level of activity are given below: Direct materials $ 8.50 Direct labor 12.00 Variable manufacturing overhead 3.40 Fixed manufacturing overhead 9.00 ($783,000 total) Variable selling expenses 4.70 Fixed selling expenses 3.50 ($304,500 total) Total cost per unit $ 41.10 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 117,450 Daks each year without any increase in fixed manufacturing overhead costs. The company could increase its sales by 35% above the present 87,000 units each year if it were willing to increase the fixed selling expenses by $110,000. Calculate the incremental net operating income. (Round all dollar amounts to 2 decimal places.) 1-b. Would the increased fixed selling expenses be justified? Yes No 2. Assume again that Andretti Company has sufficient capacity to produce 117,450 Daks each year. A customer in a foreign market wants to purchase 30,450 Daks. Import duties on the Daks would be $2.70 per unit, and costs for permits and licenses would be $15,225. The only selling costs that would be associated with the order would be $2.40 per unit shipping cost. Compute the per unit break-even price on this order. (Round your answers to 2 decimal places.) 3. The company has 400 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? (Round your answer to 2 decimal places.) 4. Due to a strike in its suppliers 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 30% of their normal level during the two-month period and the fixed selling expenses would be reduced by 20%. What would be the impact on profits of closing the plant for the two-month period? (Enter losses/reductions with a minus sign. Round intermediate calculations to 2 decimal places. Round number of units calculation and final answers to nearest whole number.) 5. An outside manufacturer has offered to produce Daks and ship them directly to Andrettis customers. If Andretti Company accepts this offer, the facilities that it uses to produce Daks would be idle; however, fixed manufacturing overhead costs would be reduced by 75%. Because the outside manufacturer would pay for all shipping costs, the variable selling expenses would be only two-thirds of their present amount. Compute the unit cost that is relevant for comparison to the price quoted by the outside manufacturer. (Do not round intermediate calculations. Round your answer to 2 decimal places.)