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. (Round number of units produced to the nearest whole number. Round your intermediate calculations and final answers to 2 decimal places. Any losses/reductions should be indicated by a minus sign.) 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 (d

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 $64 per unit. The company's unit costs at this level of activity are given below:

Direct materials $ 7.50

Direct labor 8.00

Variable manufacturing overhead 2.50

Fixed manufacturing overhead 8.00 ($664,000 total)

Variable selling expenses 1.70

Fixed selling expenses 4.50 ($373,500 total)

Total cost per unit $32.20

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

Answer:

Andretti Company

a) Total contribution margin forgone if Andretti Company closes the plant for two months:

$153,210

b) Avoidable total fixed cost with the plant closure for two months:

$43,225

c) The financial disadvantage of closing the plant for two months:

$198,518

Explanation:

a) Data and Calculations:

Unit Normal Strike Closure

Sales units 83,000 3,458

Sales Revenue at $64/unit 83,000 $5,312,000 $221,333 $0

Direct materials $ 7.50 622,500 25,935

Direct labor 8.00 664,000 27,664

Variable manufacturing overhead 2.50 207,500 8,645

Total variable manufacturing expenses $1,494,000 $62,244

Variable selling expenses 1.70 141,100 5,879

Total variable costs $1,635,100 $68,123

Contribution margin $3,676,900 $153,210

Fixed manufacturing overhead 8.00 $664,000 27,664 38,733

Fixed selling expenses 4.50 $373,500 15,561 49,800

Total fixed costs $1,037,500 $43,225 $88,533

2 months Activity Levels:

Sales unit for 2 months strike = 25% of 83,000 = 20,750/12 * 2 = 3,458

Sales revenue = 20,750 * $64 = $1,328,000/12 * 2 = $221,333

Fixed manufacturing overhead = $664,000 * 35% = 232,400/12 * 2 = $38,733

Fixed selling expenses = 4.50 $373,500 * 80% = $298,800/12 * 2 = $49,800

Disadvantage of closing the plant for two months

Fixed cost under closure $88,533

Loss of contribution under strike 153,210

Less Fixed cost under strike 43,225

Total loss under closure $198,518