Decision on Accepting Additional Business Down Home Jeans Co. has an annual plan

Question

Decision on Accepting Additional Business Down Home Jeans Co. has an annual plant capacity of 67,000 units, and current production is 46,000 units. Monthly fixed costs are $40,000, and variable costs are $25 per unit. The present selling price is $36 per unit. On February 2, 2014, the company received an offer from Fields Company for 15,100 units of the product at $29 each. Fields Company will market the units in a foreign country under its own brand name. The additional business is not expected to affect the domestic selling price or quantity of sales of Down Home Jeans Co. Hide Hint(s) a. Prepare a differential analysis on whether to reject (Alternative 1) or accept (Alternative 2) the Fields order. If an amount is zero, enter zero "0". Differential Analysis Reject Order (Alt. 1) or Accept Order (Alt. 2) February 2, 2014 Reject Order (Alternative 1) Accept Order (Alternative 2) Differential Effect on Income (Alternative 2) Revenues $ $ $ Costs: Variable manufacturing costs Income (Loss) $ $ $ b. Having unused capacity available is Selectrelevantirrelevant to this decision. The differential revenue is Selectmoreless than the differential cost. Thus, accepting this additional business will result in a net Selectgainloss. c. What is the minimum price per unit that would produce a positive contribution margin? Round your answer to two decimal places. $

Explanation / Answer

Income Statement(Alt 1) Income statement(Incremental)(Alt 2) Units Price Amount Units Price Amount Sales 46000 $          36 $        1,656,000 Sales 15100 $          29 $     437,900 Less: Variable Cost 46000 $          25 $        1,150,000 Less: Variable Cost 15100 $          25 $     377,500 Contribution 46000 $          11 $           506,000 Contribution 15100 $             4 $       60,400 Less: Fixed Cost $              40,000 Less: Fixed Cost $                 -   Net Operating Income $           466,000 Net Operating Income(Incremmental) $       60,400 Conclusion: Order should be accepted because it results in net increase in profit of $ 60,400 Having Unused capacity is relevant for this decision Minimum price should be greater than 25

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