Klean Fiber Company is the creator of Y-Go, a technology that weaves silver into
ID: 2777236 • 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 in undergarments for sports activities. Operating at capacity, the company can produce 1,065,000 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. The U.S. Army has approached Klean Fiber and expressed an interest in purchasing 249,000 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 $1.05 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).) Should Klean Fiber accept the Army's offer? Klean Fiber should the Army's offer.Explanation / Answer
Incremental analysis will only look at relevant revenue and costs. The costs that will change with the order will be analyses.
Total capacity = 1,065,000 undergarments a year. Present utilization = 70% or 0.70*1065000 = 745,500 units a year. Capacity left = 1,065,000 - 745,500 = 319,500 units. Thus US Army's order of 249,000 can be accomodated.
Incremental analysis: when the order of 249,000 undergarments is rejected, there will be nil revenues, nil variable costs. It will result in nil net income.
However, if the order is accepted, revenue per unit will be = 2.04 (direct materials)+0.42 (direct labor)+1.00 (variable manufacturing overheads)+1.05 (additional amount) = 4.51 per undergarment.
Total = per unit*number of undergarments = 4.51*249,000 = $1,122,990. The costs have been calculated similarly:
As net income is increasing by $261,45o by accepting the offer, Klean Fiber should accept the Army's offer.
Reject order Per unit Total for accept order Net Income increase/(decrease) Revenues 0 4.51 1,122,990.00 1,122,990.00 Direct materials 0 2.04 507,960.00 507,960.00 Direct labor 0 0.42 104,580.00 104,580.00 Variable overhead 0 1 249,000.00 249,000.00 Total variable costs 0 861,540.00 861,540.00 Net income 0 261,450.00 261,450.00Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.