Decision on Accepting Additional Business s Co. has an annual plant capacity of

ID: 2406425 • Letter: D

Question

Decision on Accepting Additional Business s Co. has an annual plant capacity of 64,000 units, and current production is 44,400 units. Monthly fixed costs are $39,500, and Down Home Jean variable costs are $25 per unit. The present selling price is $35 per unit. On February 2 the company received an offer from Fields Company 14,800 units of the product at $27 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 February 2 on whether to reject zero, enter zero "0 (Alternative 1) or accept (Alternative 2) the Fields order. If an amount is Differential Analysis Reject Order (Alt. 1) or Accept Order (Alt. 2) Reject Order (Alternative 1) Accept Order (Alternative 2) Differential Effect on Income (Alternative 2) Revenues Costs: Variable manufacturing costs Income (Loss) v to this decision. The differential revenue is than the differential b. Having unused capacity available is cost. Thus, accepting this additional business will result in a net c what is he minimum price per unit that would produce a posit e contribution margin? Round your answer to two decimal places.

Explanation / Answer

(a)

Reject Order

(Alternative 1)

Accept Order

(Alternative 2)

Differential Effect on Income (Alternative 2)

Revenue

(14800 * 27)

=399600

399600

Costs:-

Variable Manufacturing cost

(14800 * 25)=

-370000

Income (Loss)

29600

(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)Minimum Price per unit = Variable cost per unit i.e $25