klean fiber company is the creator of y-go, a technology that weaves silver into

ID: 2349557 • Letter: K

Question

klean fiber company is the creator of y-go, a technology that weaves silver into its fabrics to kill bacteria and odor on clothing while managing heat. Y-go has become very popular as an undergarment for sports activities. operating at capacity, the company can produce 1,000,000 undergarmnets of y-go a year. the per unit and the total costs for an individual garment when the company operates at full capacity are as follows:
per unergarment total
direct materials $2.00 $2,000,000
direct labor 0.75 750,000
variable manufacturing overhead 1.00 1,000,000
fixed manufacturing overhead 1.50 1,500,000
variable selling expenses 0.25 250,000
totals $5.50 $5,500,000

the US Army has approached Klean fiber and expressed an interest in purchasing 250,000 y-go undergarments for soldiers in extremely warm climates. the army would pay the unit cost for direct materials, direct labor, and variable manufacturing overhead costs. in addition, the army has agreed to pay an additional $1 per undergarment to cover all other costs and provide a profit. presetly, klean fiber is operating at 70% capacity and does not have any other potential buyers for y-go. if klean fiber accepts the army's offer, it will not incur any variable selling expenses related to this order.

***Use incremental analysis, determine whether klean fiber should accept the armys offer****

Explanation / Answer

They should accept the offer. Their net income will increase by $250,000.

Incremental analysis:

reject

net income increase/(decrease)

revenues

1187500

costs

937500

-937500

net income

250000

revenues = 4.75*250,000

4.75 is the direct material, direct labor and variable overhead plus $1 per undergarment.

costs = 3.75*250,000

3.75 is the direct material, direct labor,and variable overhead per undergarment. They do not incur any extra fixed overheado or selling expenses, so they are not relevant.