Question

Decision on Accepting Additional Business Down Home Jeans Co. has an annual plant capacity of 66,500 units, and current production is 44.700 units. Monthly fixed costs are $40,900, and variable costs as year, the company received an offer from Fields Company for 14,900 units of the product at $26 each. Fields Company will market the units in a to res: monthly fixed costs are $40,900, and variable costs are $25 per unit. The present selling price is $34 per unit. On November 12 of the current yuu UNIES of the product at $26 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 amo ier 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) W November 12 Reject Accept Differential Order Order Effect (Alternative 1) (Alternative 2) on Income (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.

	Reject Order (Alternative 1)	Accept Order (Alternative 2)	Differential effects on income (Alternative 2)
Revenue	$0	$387,400	$387,400
Cost
Variable manufacturing cost	$0	$372,500	$372,500
Income (Loss)	$0	$14,900	$14,900

Alternative 2 revenue = 14,900 X $26 = $387,400

Alternative 2 Variable manufacturing cost = 14,900 X $25 = $372,500

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 a net gain.

c. $25.01 is the minimum price per unit that would produce a positive contribution margin.