Problem 10-18A Relevant Cost Analysis in a Variety of Situations [L010-2, LO10-3

Question

Problem 10-18A Relevant Cost Analysis in a Variety of Situations [L010-2, LO10-3, L010-4] Andretti Company has a single product called a Dak. The company normally produces and sells 78,000 Daks each year at a selling price of $42 per unit. The company's unit costs at this level of activity are given below i Direct materials S 6.50 Direct labor Variable manufacturing overhead 12.00 2.20 i Fixed manufacturing overhead 9.00 ($702,000 total) 4.70 Variable selling expenses Fixed selling expenses 4.50 ($351,000 total) Total cost per unit 38.90 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 101,400 Daks each year without any increase in fixed manufacturing overhead costs. The company could increase its sales by 30% above the present 78,000 units each year if it were willing to increase the fixed selling expenses by $150,000. Calculate the incremental net operating income. (Round all dollar amounts to 2 decimal places) Increased sales in units Contribution margin per unit Incremental contribution margin Less added fixed selling Incremental net operati This is a numeric cell, so please enter numbers only

Explanation / Answer

Solution:

Contribution Margin per Unit = Selling price per unit – Total Variable Cost

= $42 – (6.50+12+2.2+4.7)

= $42 - $25.40

= $16.60

1-a) Calculation of the incremental net operating income

Increased Sales in Units

23400

Contribution Margin Per Unit

$16.60

Incremental Contribution margin

$388,440

Less: added fixed selling expenses

$150,000

Incremental Net Operating Income

$238,440

1-b. Would the increased fixed selling expenses be justified ? ------- YES

Because Incremental Contribution Margin is higher than Incremental fixed selling expenses and the net operating income will be increased.

2) Calculation of Per Unit Break Even Price on this order

Variable Manufacturing Cost per unit

(6.5+12+2.2)

$20.70

Import Duties Per Unit

$2.70

Permits and licenses Per Unit

($14,040 / 23,400)

$0.60

Shipping Cost per Unit

$2.10

Break-even price per unit

$26.10

3) Minimum selling price would be relevant variable cost per unit associated with the production of these units.

Total Variable Cost = 6.5+12+2.2+4.7 = $25.40

Relevant Unit Cost = $25.40 Per Unit

Please ask seperate question for other parts...

Increased Sales in Units

23400

Contribution Margin Per Unit

$16.60

Incremental Contribution margin

$388,440

Less: added fixed selling expenses

$150,000

Incremental Net Operating Income

$238,440

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