Question

Andretti Company has a single product called a Dak. The company normally produces and sells 88,000 Daks each year at a selling price of $48 per unit. The company's unit costs at this level of activity are given below:

Direct materials $9.50
Direct labor $9.00
Variable manufacturing overhead $2.90
Fixed manufacturing overhead $10.00 ($880,000 total)
Variable selling expenses $2.70
Fixed selling expenses $4.50 ($396,000 total)
Total cost per unit $38.60

Required:
Assume that Andretti Company has sufficient capacity to produce 114,400 Daks each year without any increase in fixed manufacturing overhead costs. The company could increase its sales by 30% above the present 88,000 units each year if it were willing to increase the fixed selling expenses by $140,000. Calculate the incremental net operating income.

Answer 1

The incremental net operating income for Andretti Company when increasing production and sales by 30%, with an additional $140,000 in fixed selling expenses, is $487,840.

Step-by-step explanation:

The incremental net operating income from producing and selling an additional 30% of Daks at Andretti Company, assuming a $140,000 increase in fixed selling expenses and no increase in fixed manufacturing overhead, can be calculated as follows:

Additional units: 88,000 units * 30% = 26,400 units

Additional Revenue: 26,400 units * $48/unit = $1,267,200

Additional Variable Costs: (Direct materials $9.50 + Direct labor $9.00 + Variable manufacturing overhead $2.90 + Variable selling expenses $2.70) * 26,400 units = $639,360

Additional Fixed Selling Expenses: $140,000

Therefore, incremental net operating income = Additional Revenue - (Additional Variable Costs + Additional Fixed Selling Expenses) = $1,267,200 - ($639,360 + $140,000) = $487,840.