Andretti Case Solution

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ANDRETTI COMPANY
(Relevant Costs)

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 overhead 2.30
Fixed overhead 5.00 ($300,000)
Variable selling expenses 1.20
Fixed selling expenses 3.50 ($210,000)

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

REQUIRED:

1. Assume that Andretti Company has sufficient capacity to produce 90,000 Daks each year. The company could increase its sales by 25 percent 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 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. You have been asked by the president to 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 considered to be “seconds”. Due to the irregularities, it will be impossible to sell these units at the regular price. If the company wishes to sell them through regular distribution channels, what unit cost figure is relevant for setting a minimum selling price?

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 continue to operate at 30 percent of normal...
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