Andretti Company has a single product called a Dak. The company normally produces and sells 87,000 Daks each year at a selling price of $60 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 3.00
Fixed manufacturing overhead 9.00 ($783,000 total)
Variable selling expenses 2.70
Fixed selling expenses 4.00 ($348,000 total)
Total cost per unit $ 34.20

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 121,800 Daks each year without any increase in fixed manufacturing overhead costs. The company could increase its unit sales by 40% above the present 87,000 units each year if it were willing to increase the fixed selling expenses by $110,000. What is the financial advantage (disadvantage) of investing an additional $110,000 in fixed selling expenses?

There is a financial advantage of $ 1,240,240

Explanation:

Incremental Costs and Revenues will be as follows

Increment in sales = 87,000 units × 40% = 34,800 units

Selling Price (34,800 units × $60 per unit)                                2,088,000

Less Cost of Sales                                                                      (643,800)

Direct materials ( $ 7.50 × 34,800 units )                                      261,000

Direct labor ( $ 8.00 × 34,800 units )                                             278,400

Variable manufacturing overhead ( $ 3.00 × 34,800 units )        104,400

Contribution                                                                                  1,444,200

Less Expenses

Variable selling expenses ( $ 2.70 × 34,800 units )                     (93,960)

Fixed Selling Expenses                                                                  (110,000)

Net Income                                                                                     1,240,240

Conclusion

There is a financial advantage of $ 1,240,240 of investing an additional $110,000 in fixed selling expenses.

Financial advantage = $1,240,240

Explanation:

Marginal Costs and Revenues are as follows:

Marginal sales increment:

87,000 units x 40%

= 87,000 units x 0.4

= 34,800 units

Marginal revenue from extra 40% units:

34,800 units × $60 per units

= $2,088,000

Now we calculate the marginal increment on all the company's activities:

Direct materials:

$ 7.50 × 34,800 units                      

= $261,000

Direct labor:

$ 8.00 × 34,800 units                     

= $278,400

Variable manufacturing overhead:

$ 3.00 × 34,800 units

= $104,400

Now we add all the activities:

= $261,000 + $278,400 + $104,400

= $643,800

Subtracting the cost of activities from Marginal revenue, we have:

$2,088,000 - $643,800                  

= $1,444,200

Now, we subtract the expenses:

Variable selling expenses:

$ 2.70 × 34,800 units                   

= $93,960

Fixed Selling Expenses:

= $110,000

Total:

= $203,960

Recall that we have $1,444,200 above, now we subtract the selling expenses thus:

= $1,444,200 - $203,960

= $1,240,240

From the calculations above, we can see that there is a financial advantage of $1,240,240 resulting from investing an additional $110,000 in fixed selling expenses.