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 $62 per unit. The company’s unit costs at this level of activity are given below:
Direct materials $ 7.50
Direct labor 9.00
Variable manufacturing overhead 2.40
Fixed manufacturing overhead 6.00 ($522,000 total)
Variable selling expenses 3.70
Fixed selling expenses 3.00 ($261,000 total)
Total cost per unit $ 31.60
A number of questions relating to the production and sale of Daks follow. Each question is independent.
Required:
Assume that Andretti Company has sufficient capacity to produce 108,750 Daks each year without any increase in fixed manufacturing overhead costs. The company could increase its unit sales by 25% above the present 87,000 units each year if it were willing to increase the fixed selling expenses by $150,000. What is the financial advantage (disadvantage) of investing an additional $150,000 in fixed selling expenses?
