Question

1.

Decision on Accepting Additional Business

Down Home Jeans Co. has an annual plant capacity of 66,200 units, and current production is 44,200 units. Monthly fixed costs are $41,100, and variable costs are $25 per unit. The present selling price is $34 per unit. On November 12 of the current year, the company received an offer from Fields Company for 15,600 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
	Reject Order (Alternative 1)	Accept Order (Alternative 2)	Differential Effect 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.

2.

Decision on Accepting Additional Business

Brightstone Tire and Rubber Company has capacity to produce 128,000 tires. Brightstone presently produces and sells 98,000 tires for the North American market at a price of $95 per tire. Brightstone is evaluating a special order from a European automobile company, Euro Motors. Euro is offering to buy 15,000 tires for $79.75 per tire. Brightstone's accounting system indicates that the total cost per tire is as follows:

Direct materials	$36
Direct labor	13
Factory overhead (70% variable)	22
Selling and administrative expenses (40% variable)	19
Total	$90

Brightstone pays a selling commission equal to 5% of the selling price on North American orders, which is included in the variable portion of the selling and administrative expenses. However, this special order would not have a sales commission. If the order was accepted, the tires would be shipped overseas for an additional shipping cost of $5 per tire. In addition, Euro has made the order conditional on receiving European safety certification. Brightstone estimates that this certification would cost $75,000.

a. Prepare a differential analysis dated January 21 on whether to reject (Alternative 1) or accept (Alternative 2) the special order from Euro Motors. If an amount is zero, enter zero "0". If required, round interim calculations to two decimal places.

Differential Analysis
Reject Order (Alt. 1) or Accept Order (Alt. 2)
January 21
	Reject Order (Alternative 1)	Accept Order (Alternative 2)	Differential Effect on Income (Alternative 2)
Revenues	$	$	$
Costs:
Direct materials
Direct labor
Variable factory overhead
Variable selling and admin. expenses
Shipping costs
Certification costs
Income (Loss)	$	$	$

Determine whether to reject (Alternative 1) or accept (Alternative 2) the special order from Euro Motors.

b. What is the minimum price per unit that would be financially acceptable to Brightstone? Round your answer to two decimal places.

Answer 1

Solution 1.)

a)

	Reject order (Alternative 1)	Accept order (Alternative 2)	Differental effect on income (Alternative 2)
Revenue	$0	$436,800 (15,600 units ×$28 per unit)	$436,800
Cost:
Variable cost	$0	$390,000 (15,600 units × $25 per unit)	-$390,000
Net income	$0	$46,800	$46,800

1 b.) Having unused capacity available is useful to this decision. The differential revenue is more than the differential costs. Thus, accepting this additional business will result in a net gain.

1c.)

Any price above $25 per unit will produce a positive contribution margin.

Solution 2)

2a.)

	Reject order (Alternative 1)	Accept order (Alternative 2)	Differential effect on income (Alternative 2)
Revenue	$0	$1,196,250(15000 × $79.75)	$1,196,250
Costs:
Direct materials	$0	$540,000 (15,000 × $36)	-$540,000
Direct labor	$0	$195,000 (15,000 × $13)	-$195,000
Variable factory overhead	$0	$231,000 (15,000 × $22 × 70%)	-$231,000
Variable selling and administrative expenses	$0	$42,750 [(15,000 × $19 × 40%)- (15,000 × $95 × 5%)	-$42,750
Shipping cost	$0	$75,000 (15000 × $5)	-$75,000
Certification cost	$0	$75,000	-$75,000
Income (loss)			$37,500

2.b.)

Minimum price per unit

= $79.75 - $37,500 /15,000 units

= $77.25 per unit