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

Question

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 81,000 Daks each year at a selling price of $50 per unit. The company's unit costs at this level of activity are given below Direct materials Direct labor Varlable manufacturing overhead Fixed manufacturing overhead Variable selling expenses Fixed selling expenses S 8.50 10.00 3 30 10 00 (5810,000 total) 3.70 6.50 ($526,500 tolal) Total cost per unit $ 42 00 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 105,300 Daks each year without any increase in fixed manufacturing overhead costs The company could increafe its sales by 30% above the present 81,000 units each year if it were willing to increase the fixed šelling expenses by $110,000 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 foxed selling expense Incremental net operating income 0.00 1-b Would the increased fixed selling expenses be justified? O No O Yes 2. Assume again that Andretti Company has sufficient capacity to produce 105,300 Daks each year A customer in a foreign market wants to purchase 24,300 Daks. Import duties on the Daks would be 52.70 per unit, and costs for pernits and licenses would be $14,580. The only selling costs that would be associated with the order would be $2. 70 per unit shipping cost Compute the per unit break-even price on this order. (Round your answers to 2 decimal places-) Variable unit ing cost per

Explanation / Answer

1a).

1b) Yes, The Increased Fixed Selling Expenses be Justified

2).

3). The Relevent Cost per unit is $3.70.

The relevent cost of the units that are considered to be seconds is the variable selling expense.

4).

Working Note :-

1). Contribution margin lost = ((81000 units / 12 months) * 2 months) * 25% * $24.5

= 13500 * 0.25 * $24.5

= $82687.5 or $82688

2). Fixed Manufacturing Overhead Cost = (Total Cost / 12 months) * 2 months * 40%

= ($810000 / 12) * 2 * 0.40

= $54000

3). Fixed Selling Expenses = (Total Cost / 12 months) * 2 months * (100% - 20%)

= ($526500 / 12) * 2 * 80%

= $70200

Increased Sales in Units(a) (81000*30%) 24300 Contribution Margin per unit(b)($50-($8.5+$10+$3.3+$3.7) $24.5 Incremental Contribution Margin(c = a*b) 595350 Less : Added Fixed Selling Expenses(d) 110000 Incremental Net Operating Income(e = c-d) 485350

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