andretti 457850

ANDRETTI COMPANY

(Relevant Costs)

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 are given below:

Direct materials $10.00

Direct labor 4.50

Variable overhead 2.30

Fixed overhead 5.00 ($300,000)

Variable selling expenses 1.20

Fixed selling expenses 3.50 ($210,000)

A number of questions relating to the production and sale of Daks are given below. Each question is independent.

REQUIRED:

1.

Assume that Andretti Company has sufficient capacity to produce 90,000 Daks each year. The company could increase its sales by 25 percent above the present 60,000 units each year if it were willing to increase the fixed selling expenses by $80,000. Would the increased fixed expenses be justified?

2.

Assume again that Andretti Company has sufficient capacity to produce 90,000 Daks each year. A customer 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 licenses 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 regular price. If the company wishes to sell them through regular distribution channels, what unit cost figure is relevant for setting a minimum selling price?

2

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 continue to operate at 30 percent 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 overhead costs would continue at 60 percent of their normal level during the two month period; the fixed selling costs would be reduced by 20 percent while the plant was closed. 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 percent of their present level. Since the outside manufacturer would pay for all the costs of shipping, the variable selling costs would be only two thirds of their present amount. Compute the unit cost figure that is relevant for comparison against whatever quoted price is received from the outside manufacturer.