Homestead Jeans Co. has an annual plant capacity of 65,000 units, and current pr
ID: 2472278 • Letter: H
Question
Homestead Jeans Co. has an annual plant capacity of 65,000 units, and current production is 45,000 units. Monthly fixed costs are $54,000, and variable costs are $29 per unit. The present selling price is $42 per unit. On November 12 of the current year, the company received an offer from Dawkins Company for 18,000 units of the product at $32 each. Dawkins 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 Homestead Jeans Co. Required: A. Prepare a differential analysis dated November 12 on whether to reject (Alternative 1) or accept (Alternative 2) the Dawkins order. Refer to the lists of Labels and Amount Descriptions for the exact wording of the answer choices for text entries. For those boxes in which you must enter subtracted or negative numbers use a minus sign. If there is no amount or an amount is zero, enter "0". A colon (:) will automatically appear if required. B. Briefly explain the reason why accepting this additional business will increase operating income. C. What is the minimum price per unit that would produce a positive contribution margin? If required, round your answer to two decimal places.
Explanation / Answer
New order
No of units
18000 units
selling price
32
Sales revenue (18,000 units * $32)
576,000
Less:
Variable cost (18,000 units * $29 per units)
522,000
Contribution Margin
54,000
Differential income is $54,000
Note: Fixed expenses are irrelevant to decision to accept the new order as the same is considered as period cost.
Minimum Price that produce a positive contribution is the cost of all variable expenses per unit.
So, minimum price per unit $29 per unit.
At $29 per unit the Homestead Jeans Co. is Indifference as to contribution margin (Contribution margin = $0)
- Preparation of a differential analysis:
New order
No of units
18000 units
selling price
32
Sales revenue (18,000 units * $32)
576,000
Less:
Variable cost (18,000 units * $29 per units)
522,000
Contribution Margin
54,000
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