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 as an undergarment for sports activities. Operating at capacity, the company can produce 1,075,500 undergarments 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 Undergarment Total

Direct materials $1.93 $2,075,715

Direct labor 0.58 623,790

Variable manufacturing overhead 0.98 1,053,990

Fixed manufacturing overhead 1.44 1,548,720

Variable selling expenses 0.39 419,445

Totals $5.32 $5,721,660

The U.S. Army has approached Klean Fiber and expressed an interest in purchasing 250,700 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 $1.09 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.

Explanation / Answer

Klean Fiber US Army Offer Details Per unit Amt $ Direct Materials                       1.93 Direct Labor                       0.58 Variable Mfg OH                       0.98 Additional Amount per unit                       1.09 Total Revenue per unit                       4.58 US Army purchase qty            250,700.0 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                           -       1,148,206.00 1,148,206.0 Variable costs Direct Materials                           -           483,851.00    (483,851.0) Direct Labor                           -           145,406.00    (145,406.0) Variable Mfg OH                           -           245,686.00    (245,686.0) Total Variable costs         874,943.00    (874,943.0) Net Income                           -           273,263.00       273,263.0 As there is positive net income of $ 273,263 , Klean Fiber should accept the offer.

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