Klean Fiber Company is the creator of Y-Go, a technology that weaves silver into

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 in undergarments for sports activities. Operating at capacity, the company can produce 1,053,000 Y-Go undergarments a year. The per unit and the total costs for an individual garment when the company operates at full capacity are as follows Per Undergarment Total Direct materials Direct labor Variable manufacturing overhead Fixed manufacturing overhead Variable selling expenses $1.96 0.47 0.98 1.41 0.38 $5.20 $2,063,880 494,910 1,031,940 1,484,730 400,140 $5,475,600 Totals The U.S. Army has approached Klean Fiber and expressed an interest in purchasing 249,700 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 $1.01 per undergarment to cover all other costs and provide a profit. Presently, 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. Prepare an incremental analysis for the Klean Fiber. (Enter negative amounts using either a negative sign preceding the number e.g. -45 or parentheses e.g. (45).)

Explanation / Answer

Klean Fiber US Army Offer Details Per unit Amt $ Direct Materials                      1.96 Direct Labor                      0.47 Variable Mfg OH                      0.98 Additional Amount per unit                      1.01 Total Revenue per unit                      4.42 US Army purchase qty           249,700.0 Assuming Fixed costs remains the same and no additional fixed cost incurred for US army Offer Incremental Analysis for US Army Offer Details Reject Offer Accept Offer Net Income Increase/(Decrease) Revenues                           -         1,103,674.00        1,103,674.0 Variable costs Direct Materials                           -             489,412.00          (489,412.0) Direct Labor                           -             117,359.00          (117,359.0) Variable Mfg OH                           -             244,706.00          (244,706.0) Total Variable costs           851,477.00          (851,477.0) Net Income                           -             252,197.00            252,197.0 As there is positive net income of $ 252,197 , Klean Fiber should accept the offer.

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