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. Per Undergarment Total Direct materials $1.92 $2,044,800 Direct labor 0.43 457,950 Variable manufacturing overhead 1.02 1,086,300 Fixed manufacturing overhead 1.53 1,629,450 Variable selling expenses 0.37 394,050 Totals $5.27 $5,612,550

Answer 1

ANSWER:

	Reject order	Accept order	Net income increase (decrease)
Revenue	0	$1110540	$1110540
Variable costs:
direct material	0	$478080	-$478080
Direct labor	0	$107070	-$107070
Variable overhead	0	$253980	-$253980
Total variable costs	0	$839130	-$839130
Net income	0	$271410	$271410

Klean Fiber should accept the offer.

Notes:

Revenue = 249000 x ($1.92 + $0.43 + $1.02 + $1.09)

= $1110540

direct material = 249000 x $1.92 = $478080

direct labor = 249000 x $0.43 = $107070

variable overhead = 249000 x $1.02 = $253980