Question

Decision on Accepting Additional Business

Homestead Jeans Co. has an annual plant capacity of 65,000 units, and current production is 45,000 units. Monthly fixed costs are $54,000, and variable costs are $29 per unit. The present selling price is $42 per unit. On November 12 of the current year, the company received an offer from Dawkins Company for 18,000 units of the product at $32 each. Dawkins 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 Homestead Jeans Co.

a. Prepare a differential analysis dated November 12 on whether to reject (Alternative 1) or accept (Alternative 2) the Dawkins order. If an amount is zero, enter "0". If required, use a minus sign to indicate a loss.

Differential Analysis
Reject Order (Alt. 1) or Accept Order (Alt. 2)
November 12
	Reject Order (Alternative 1)	Accept Order (Alternative 2)	Differential Effects (Alternative 2)
Revenues	$	$	$
Costs:
Variable manufacturing costs
Profit (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

Answer
	Differential Analysis - Special order - Homestead Jeans Company
Answer A3
	Particulars	Reject order	Accept order	Net Income Increase (Decease)
	Revenues	$                 -	$             5,76,000	$                      5,76,000
	Costs:
	Variable costs	$                 -	$             5,22,000	$                      5,22,000
	Net Income	$                 -	$                54,000	$                         54,000
Answer B	Accpetance and Reason
	Accepting additional business will increase operating income. Further there is no change in fixed costs as company is having spare capacity available
Answer C	Minimum price per unit that would produce a positive contribution margin per unit = Variable cost per unit = $29 per unit