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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 as an undergarment for sports activities. Operating at capacity, the company can produce 1,083,400 undergarments of Y-Go 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 $1.95 $2,112,630 Direct labor 0.51 552,534 Variable manufacturing overhead 1.06 1,148,404 Fixed manufacturing overhead 1.56 1,690,104 Variable selling expenses 0.31 335,854 Totals $5.39 $5,839,526
The U.S. Army has approached Klean Fiber and expressed an interest in purchasing 250,600 Y-Go undergarments for soldiers in extremely warm climates. The Army would pay the unit cost for direct materials, direct labor, and variable manufacturing overhead costs. In addition, the Army has agreed to pay an additional $1.07 per undergarment to cover all other costs and provide a profit. Presently, Klean Fiber is operating at 70% capacity and does not have any other potential buyers for Y-Go. If Klean Fiber accepts the Army’s offer, it will not incur any variable selling expenses related to this order.
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Explanation / Answer
Total Capacity of a company = 1083400/70% = 1547714.29 units. As company does not have any other potential buyers for Y-Go. So company having spare capacity. If Klean Fiber accepts the Army’s offer, it will not incur any variable selling expenses related to this order.
By accepting thiis offer Company will able to earn extra income of $268142.
Reject Accept Net Income Order Order Increase (Decrease) Revenues $0 2032366 2032366 Variable costs: Direct materials 0 488670 488670 Direct labor 0 127806 127806 Variable overhead 0 265636 265636 Total variable costs 0 882112 882112 Net income $0 268142 268142Related Questions
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