Problem 1 - Relevant Cost Analysis in a Variety of Situations

Andretti Company has a single product called a Dak. The company normally Produces and sells 83,000 Daks each year at a selling price of $48 per unit. The company's unit costs at this level of activity are given below:

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 112,050 Daks each year without any increase in fixed manufacturing overhead costs. The company could increase its unit sales by 35% above the present 83,000 units each year if it were willing to increase the fixed selling expenses by $120,000. What is the financial advantage (disadvantage) of Investing an additional $120,000 in fixed selling expenses?

1-b. Would the additional investment be Justified?

2. Assume again that Andrew Company has sufficient capacity to produce 112,050 Daks each year. A customer In a foreign market wants to purchase 29,050 Daks. If Andretti accepts this order it would have to pay Import duties on the Daks of $4.70 per unit and an additional $14,525 for permits and licenses. The only selling costs that would be associated with the order would be $2.00 per unit shipping cost. What is the break-even price net unit on this order?

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 charms. What is the unit cost figure that is relevant for setting a minimum selling price?

4. Due to a strike in its suppliers plant. Andrew Company Is unable to purchase more material for the production of Oaks The strike is expected to last for two months. Andrew 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 35% of then normal level during the two-month period and the fixed selling expenses would be reduced by 20% Outing the two-month period.

a. How much total contribution margin MI Andretti forgo if it closti the plant for two months?

b. How much total fixed cost will the company avoid if it closes the plant for two months?

c. What is the financial advantage (disadvantage) of closing the plant for the two-month period?

d. Should Andretti close the plant for two months?

5. An outside manufacturer has offered to produce 83,000 Oaks and ship them directly to Andrents 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 What is Andrew's avoidable cost per unit that it should compare to the price quoted by the outside manufacturer?

Complete this question -

Assume that Andretti Company has sufficient capacity to produce 112,050 Daks each year without any increase in fixed manufacturing overhead costs. The company could increase its unit sales by 35% above the present 83,000 units each year if it were willing to increase the fixed selling expenses by $120,000. What is the financial advantage (disadvantage) of investing an additional $120,000 in fixed seeing expenses?

Assume that Andretti Company has sufficient capacity to produce 112,050 Daks each year without any increase in fixed manufacturing overhead costs. The company could increase its urit sales by 35% above the present 83,000 units each year if it were willing to increase the fixed selling expenses by $120,000. Would the additional investment be justified?

Assume again that Andretti Company has sufficient capacity to produce 112,050 Daks each year. A customer in a foreign market wants to purchase 29,050 Oaks. If Andretti accepts this order it would have to pay import duties on the Daks of $4.70 per unit and an additional $14,525 for permits and licenses. The only selling costs that would be associated with the order would be $2.00 per unit shipping cost. What is the break-even price per unit on this order?

The company has 400 Daks on hand that have some irregularities and are therefore considered to be 'seconds.' Due to the irregulanties, it will be imposstle to sell these units at the normal pnce through regular distribution channels. What is the unit cost figure that is relevant for setting a minimum selling pnce?

Due to a strike in its supplier's plant, Andretti Company is triable to purchase more matenal for the production of Daks. The strike is expected to last for two months. Andretti Company has enough matenal 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 35% of their normal level during the two-month period and the fixed selling expenses would be reduced by 20% during the two-month period.

a. How much total contribution margin will Andretti forgo if it closes the plant for two months?

b. How much total fixed cost will the company avoid if it closes the plant for two months?

c. What is the financial advantage (disadvantage) of closing the plant for the two-month period?

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 35% of their normal level during the two-month period and the fixed selling expenses would be reduced by 20% during the two-month period, Should Andretti close the plant for two months?

An outside manufacturer has offered to produce 83,000 Daks and shop them directly to Anclrettil customers. If Andretti Company accepts this offer, the facilities that It uses to produce Oaks would be Idle: however, fond 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. what is Andretti's avoidable cost per unit that it should compare to the price quoted by the outside manufacturer? (Do not round intermediate calculations. Round your answers to 2 decimal places.)

Problem 2 - Dropping or Retaining a Flight

Profits have been decreasing for several years at Pegasus Airlines. In an effort to improve the company's performance. the company is thinking about dropping several flights that appear to be unprofitable.

A typical Income statement for one round-trip of one such flight Might 482) Is as follows:

The following additional information Is available about flight 482:

a. Members of the flight crew are paid fixed annual salaries, whereas the flight assistants are paid based on the number Of round trips they complete.

b. One-third of the liability insurance is a special charge assessed against flight 482 because in the opinion of the insurance company. the destination of the flight is in a -high-risk- area. The remaining two.thirds would be unaffected by a decision to drop flight 482.

c. The baggage loading and flight preparation expense Is an allocation of ground crews' salaries and depreciation of ground equipment. Dropping flight 482 would have no effect on the company's total baggage loading and flight preparation expenses.

d. If flight 482 is dropped. Pegasus Airlines has no authorization at present to replace It with another flight

e. Aircraft depreciation is due entirety to obsotescence. Depreciation due to wear and tear is negligible.

f. Dropping flight 482 would not allow Pegasus Airlines to reduce the number of aircraft in its fleet or the number of flight crew on its payroll.

Required: What is the financial advantage (disadvantage) of discontinuing flight 482?

Problem 3 - Make or Buy Decision

Silven Industries, which manufactures and sells a highly successful line of summer lotions and insect repellents, has decided to diversify in order to stabilize sales throughout the year. A natural area for the company to consider is the production of winter lotions and creams to prevent dry and chapped skin.

After considerable research, a winter products line has been developed. However, Silven's president has decided to introduce only one of the new products for this coming winter. If the product is a success, further expansion in future years will be initiated.

The product selected (called Chap-Off) is a lip balm that will be sold in a lipstick-type tube. The product will be sold to wholesalers in boxes of 24 tubes for $9 per box. Because of excess capacity, no additional fixed manufacturing overhead costs will be incurred to produce the product. However, a $99,000 charge for fixed manufacturing overhead will be absorbed by the product under the company's absorption costing system.

Using the estimated sales and production of 110,000 boxes of Chap Off, the Accounting Department has developed the following manufacturing cost per box:

The costs above relate to making both the lip balm and the tube that contains it. As an alternative to making the tubes for Chap-Off. Silven has approached a supplier to discuss the possibility of buying the tubes. The purchase price of the supplier's empty tubes would be $145 per pox of 24 tubes. If Silven Industries stops making the tubes and buys them from the outside supplier, its direct labor and variable manufacturing overhead costs per box of Chap-Off would be reduced by 10% and its direct materials costs would be reduced by 25%.

Required:

1. If Silven buys its tubes from the outside supplier, how much of its own Chap-Off manufacturing costs per box will it be able to avoid? (Hint: You need to separate the manufacturing overhead of $160 per box that is shown above into as variable and fixed components to derive the correct answer)

2. What is the financial advantage (disadvantage) per box of Chap-Off if Silven buys as tubes from the outside supplier?

3. What is the financial advantage (disadvantage) in total (not per box) if Silven buys 110,000 boxes of tubes from the outside supplier?

4. Should Silven Industries make or buy the tubes?

5. What is the maximum price that Silven should be willing to pay the outside supplier for a box of 24 tubes?

6. Instead of sates of 110,000 boxes of tubes, revised estimates show a sales volume of 132,000 boxes of tubes. At this higher sales volume, Silven would need to rent extra equipment at a cost of S42,000 per year to make the additional 22,000 boxes of tubes. Assuming that the outside supplier will not accept an order for less than 132,000 boxes of tubes, what is the financial advantage (disadvantage) in total (not per box) if Silven buys 132,000 boxes of tubes from the outside supplier? Given this new information, should Silven Industries make or buy the tubes?

7. Refer to the data in (6) above. Assume that the outside supplier will accept an order of any size for the tubes at a price of $1.45 per box. How many boxes of tubes should Silven make? How many boxes of tubes should it buy from the outside supplier?

Complete this question -

If Silven buys its tubes from the outside supplier, how much of its own Chap-Off manufacturing costs per box will it be able to avoid?

What is the financial advantage (disadvantage) per box of Chap-Off if Skeen buys its tubes from the outside supplier?

What is the financial advantage (disadvantage) in total (not per box) if Silven buys 110,000 boxes of tubes from the outside supplier?

Should Silven Industries make or buy the tubes?

What is the maximum price that Silven should be wiling to pay the outside supplier for a box of 24 tubes?

Instead of salts of 110,000 boxes of tubes, revised estimates show a sales volume of 132,000 boxes of tubes. At this higher sales volume, Silven would need to rent extra equipment at a cost of $42,000 per year to make the additional 22,000 boxes of tubes. Assuming that the outside supplier will not accept an order for less than 132,000 boxes of tubes, what is the financial advantage (disadvantage) in total (not per box) if Silven buys 132,000 boxes of tubes from the outside supplier? Given this new information, should Silven Industries make or buy the tubes?

Refer to the data in (6) above. Assume that the outside supplier mg accept an order of any size for the tubes at a price of $1.45 per box. How many boxes of tubes should Silven make? How many boxes of tubes should it buy from the outside supplier?