Question

Decision on Accepting Additional Business Down Home Jeans Co. has an annual plant capacity of 63,700 units, and current production is 43,600 units. Monthly fixed costs are $38,600, and variable costs are $25 per unit. The present selling price is $38 per unit. On November 12 of the current year, the company received an offer from Fields Company for 16,400 units of the product at $28 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. a. Prepare a differential analysis dated November 12 on whether to reject (Alternative 1) or accept (Alternative 2) the Fields order. If an amount is zero, enter zero "0". For those boxes in which you must enter subtracted or negative numbers use a minus sign. Differential Analysis Reject Order (Alt. 1) or Accept Order (Alt. 2) November 12 Differential Reject Accept Effect Order Order on Income (Alternative 1) (Alternative 2) 21 (Alternative 2) Revenues Costs: Variable manufacturing costs Income (Loss) b. Having unused capacity available is to this decision. The differential revenue is than the differential cost. Thus, accepting this additional business will result in a net c. What is the minimum price per unit that would produce a positive contribution margin? Round your answer to two decimal places.

Answer 1

a.

Differential Analysis Reject order (Alt.1) or Accept order (Alt.2) November 12
	Reject order (Alternative 1)	Accept order (Alternative 2)	Differential effect on income (Alternative 2)
Revenues	$1,656,800	$2,116,000	$459,200
Costs:
Variable manufacturing cost	1,090,000	1,500,000	410,000
Income (loss)	$566,800	$616,000	$49,200

b.

Having unused capacity available is relevant to this decision. The differential revenue is more than the differential cost. Thus accepting this additional business will result in net income increase.

c.

Minimum price per unit = 25.01 per unit

Minimum price per unit that would produce positive contribution margin should be more than variable cost per unit.