Homework #4
Andretti Company has a single product called a Dak. The company normally produces and sells 86,000 Daks each year at a selling price
of $44 per unit. The company’s unit costs at this level of activity are given below:
Direct materials $ 9.50
Direct labor 12.00
Variable manufacturing overhead 2.60
Fixed manufacturing overhead 6.00 ($516,000 total)
Variable selling expenses 3.70
Fixed selling expenses 5.50 ($473,000 total)
Total cost per unit $ 39.30
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 111,800 Daks each year without any increase in fixed manufacturing
overhead costs. The company could increase its sales by 30% above the present 86,000 units each year if it were willing to increase the
fixed selling expenses by $100,000. Calculate the incremental net operating income. (Round your answers to the nearest whole
number.)
Increased sales in units
Contribution margin per unit
Incremental contribution margin
Less added fixed selling expense
Incremental net operating income
1-b. Would the increased fixed selling expenses be justified?
Yes
No
2. Assume again that Andretti Company has sufficient capacity to produce 111,800 Daks each year. A customer in a foreign market wants
to purchase 25,800 Daks. Import duties on the Daks would be $1.70 per unit, and costs for permits and licenses would be $18,060. The
only selling costs that would be associated with the order would be $2.40 per unit shipping cost. Compute the per unit
eak-even price on
this order. (Round your answers to 2 decimal places.)
Variable manufacturing cost per unit
Import duties per unit
Permits and licenses
Shipping cost per unit
Break-even price per unit
3. The company has 400 Daks on hand that have some i
egularities and are therefore considered to be "seconds." Due to the
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egularities, it will be impossible to sell these units at the normal price through regular distribution channels. What unit cost figure is
elevant for setting a minimum selling price? (Round your answer to 2 decimal places.)
Relevant unit cost per unit
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 40% of their normal level during the two-month period and the fixed selling expenses would be reduced
y 20%. What would be the impact on profits of closing the plant for the two-month period? (Any losses should be indicated by a minus
sign. Round all calculations (intermediate and final) to whole numbers. Round unit calculations to whole numbers.)
Contribution margin lost
Fixed costs
Fixed manufacturing overhead cost
Fixed selling cost
Net advantage (disadvantage) of closing the plant
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 can be avoided if purchased from the outside manufacturer. (Do not round intermediate
calculations. Round your answer to 2 decimal places.)
Variable manufacturing costs
Fixed manufacturing overhead cost
Variable selling expense
Total costs avoided
Worksheet Learning Objective: 07-02
Prepare an analysis showing
whether a product line o
other business segment
should be added or dropped.
Learning Objective: 07-04 Prepare an analysis showing
whether a special order should be accepted.
Difficulty: 2 Medium Learning Objective: 07-03
Prepare a make or buy
analysis.
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(Prepared from a situation suggested by Professor John W. Hardy.) Lone Star Meat Packers is a major processor of beef and other meat
products. The company has a large amount of T-bone steak on hand, and it is trying to decide whether to sell the T-bone steaks as they
are initially cut or to process them further into filet mignon and the New York cut.
If the T-bone steaks are sold as initially cut, the company figures that a 1-pound T-bone steak would yield the following profit:
Selling price ($2.40 per pound) $ 2.40
Less joint costs incu
ed up to the split-off point where
T-bone steak can be identified as a separate product 1.35
Profit per pound $ 1.05
As mentioned above, instead of being sold as initially cut, the T-bone steaks could be further processed into filet mignon and New York cut
steaks. Cutting one side of a T-bone steak provides the filet mignon, and cutting the other side provides the New York cut. One 16-ounce
T-bone steak cut in this way will yield one 6-ounce filet mignon and one 8-ounce New York cut; the remaining ounces are waste. The cost
of processing the T-bone steaks into these cuts is $0.12 per pound. The filet mignon can be sold for $3.60 per pound, and the New York
cut can be sold for $3.00 per pound.
Required:
1. Determine the profit per pound from processing the T-bone steaks into filet mignon and New York cut steaks. (Do not round
intermediate calculations. Round your answers to 2 decimal places.)
Per 16-Ounce
T-Bone
Sales from further processing:
Sales price of one filet mignon
Sales price of one New York cut
Total revenue from further processing
Less sales revenue from one T-bone steak
Incremental revenue from further processing
Less cost of further processing
Profit(loss) per pound from further processing
2. Would you recommend that the T-bone steaks be sold as initially cut or processed further?
T-bone steaks should be sold as initially cut.
T-bone steaks should be processed further.
Worksheet Difficulty: 1 Easy Learning Objective: 07-07 Prepare an analysis showing
whether joint products should be sold at the split-off point
or processed further.
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Profits have been decreasing for several years at Pegasus Airlines. In an effort to improve the company’s performance, consideration is
eing given to dropping several flights that appear to be unprofitable.
A typical income statement for one round-trip of one such flight (flight 482) is as follows:
Ticket revenue (100 seats × 40% occupancy × $70 ticket price) $ 2, XXXXXXXXXX %
Variable expenses ($14.00 per person XXXXXXXXXX % (rounded)
Contribution margin 2, XXXXXXXXXX % (rounded)
Flight expenses:
Salaries, flight crew $ 320
Flight promotion 720
Depreciation of aircraft 410
Fuel for aircraft 200
Liability insurance 150
Salaries, flight assistants 730
Baggage loading and flight preparation 180
Overnight costs for flight crew and assistants at destination 70
Total flight expenses 2,780
Net operating loss $ (540)
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.
. 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 entirely to obsolescence. 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:
1. Prepare an analysis showing what impact dropping flight 482 would have on the airline's profits. (Any losses/ reductions should be
indicated by a minus sign.)
Contribution margin lost if the tour is discontinued
Less flight costs that can be avoided if the flight is discontinued:
Flight promotion
Fuel for aircraft
Liability insurance
Salaries, flight assistants
Overnight costs for flight crew and assistants
Net increase (decrease) in profits if the flight is discontinued
ev: 12_17_2016_QC_CS-72514
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Worksheet Difficulty: 1 Easy Learning Objective: 07-02 Prepare an analysis showing
whether a product line or other business segment should be
added or dropped.
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Polaski Company manufactures and sells a single product called a Ret. Operating at capacity, the company can produce and sell 32,000
Rets per year. Costs associated with this level of production and sales are given below:
Unit Total
Direct materials $ 15 $ 480,000
Direct labor 8 256,000
Variable manufacturing overhead 3 96,000
Fixed manufacturing overhead 7 224,000
Variable selling expense 4 128,000
Fixed selling expense 6 192,000
Total cost $ 43 $ 1,376,000
The Rets normally sell for $48 each. Fixed manufacturing overhead is constant at $224,000 per year within the range of 27,000 through
32,000 Rets per year.
Required:
1. Assume that due to a recession, Polaski Company expects to sell only 27,000 Rets through regular channels next year. A large retail
chain has offered to purchase 5,000 Rets if Polaski is willing to accept a 16% discount off the regular price. There would be no sales
commissions on this order; thus, variable selling expenses would be slashed by 75%. However, Polaski Company would have to purchase
a special machine to engrave the retail chain’s name on the 5,000 units. This machine would cost $10,000. Polaski Company has no
assurance that the retail chain will purchase additional units in the future. Determine the impact on profits next year if this special order is
accepted.
Net profit by
2. Refer to the original data. Assume again that Polaski Company expects to sell only 27,000 Rets through regular channels next year. The
U.S. Army would like to make a one-time-only purchase of 5,000 Rets. The Army would pay a fixed fee of $1.60 per Ret, and it would
eimburse Polaski Company for all costs of production (variable and fixed) associated with the units. Because the army would pick up the
Rets with its own trucks,