Reference no: EM131910601

Problem 1:

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 manufacturing overhead ........................................ 2.30

Fixed manufacturing overhead  ............................................ 5.00 ($300,000 total)

Variable selling expenses ................................................... 1.20

Fixed selling expenses ....................................................... 3.50     ($210,000 total)

Total cost per unit ......................................................................... $26.50

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

Required:

1. Assume that Andretti Company has sufficient capacity to produce 90,000 Daks each year without any increase in fixed manufacturing overhead costs. The company could increase its sales by 25% 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 selling 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. 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 consid-ered 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 set-ting a minimum selling price? Explain.

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 Final PDF to printer
has enough material on hand to operate at 30% 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 60% 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?

5. An outside manufacturer has offered to produce Daks and ship them directly to Andretti's cus-tomers. 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 75%. 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.

PROBLEM 2:

Dropping or Retaining a Segment

Jackson County Senior Services is a nonprofit organization devoted to providing essentialservices to seniors who live in their own homes within the Jackson County area. Three services are provided for seniors-home nursing, Meals On Wheels, and housekeeping. Data on revenue and expenses for the past year follow:

	Total	Home Nursing	Meals On Wheels	House- keeping
Revenues.......................................................	$900,000	$260,000	$400,000	$240,000
Variable expenses.............................	490,000	120,000	210,000	60,000
Contribution margin..........................	410,000	140,000	190,000	80,000
Fixed expenses:
Depreciation ..................................	68,000	8,000	40,000	20,000
Liability insurance.........................	42,000	20.000	7,000	15,000
Program administrators' salaries ..	115,000	40,000	38,000	37,000
General administrative overhead' .	180.000	52,000	80,000	48,000
Total fixed expenses ........................	405,000	120,000	165,000	120,000
Net operating income (loss) .............	$        5,000	$ 20,000	$ 25,000	$ (40,000)

The head administrator of Jackson County Senior Services, Judith Miyama, is concerned about the organization's finances and considers the net operating income of $5,000 last year to be razor-thin. (Last year's results were very similar to the results for previous years and are represen-tative of what would be expected in the future.) She feels that the organization should be building its financial reserves at a more rapid rate in order to prepare for the next inevitable recession. After seeing the above report, Ms. Miyama asked for more information about the financial advisability of perhaps discontinuing the housekeeping program.The depreciation in housekeeping is for a small van that is used to carry the housekeepers and their equipment from job to job. If the program were discontinued, the van would be donated to a charitable organization. None of the general administrative overhead would be avoided if the housekeeping program were dropped, but the liability insurance and the salary of the program administrator would be avoided.

Required:

1. Should the Housekeeping program be discontinued? Explain. Show computations to support your answer.

2. Recast the above data in a format that would be more useful to management in assessing the long-run financial viability of the various services.