Andretti Company has a single product called a Dak. The company
normally produces and sells 80,000 Daks each year at a selling
price of $48 per unit. The company’s unit costs at this level of
activity are given below:

Direct
materials
$
7.50

Direct labor

11.00

Variable
manufacturing overhead

2.80

Fixed manufacturing
overhead

4.00
($320,000 total)

Variable selling
expenses

2.70

Fixed selling
expenses

5.50
($440,000 total)

Total cost per
unit
$
33.50

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
112,000 Daks each year without any increase in fixed manufacturing
overhead costs. The company could increase its sales by 40% above
the present 80,000 units each year if it were willing to increase
the fixed selling expenses by $100,000. Calculate the incremental
net operating income. (Round all dollar amounts to 2
decimal places.)

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

No

Yes

2.

Assume again that Andretti Company has sufficient capacity to
produce 112,000 Daks each year. A customer in a foreign market
wants to purchase 32,000 Daks. Import duties on the Daks would be
$4.70 per unit, and costs for permits and licenses would be
$16,000. The only selling costs that would be associated with the
order would be $1.80 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 800 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 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 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 all calculations
(intermediate and final) to whole numbers. Round unit calculations
to whole numbers.)

5.

An outside manufacturer has offered to produce Daks and 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 manufacturing overhead costs would be reduced
by 30%. 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.)

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