Decision on Accepting Additional Business Homestead Jeans Co. has an annual plan

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, 2014, 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 on whether to reject (Alternative 1) or accept (Alternative 2) the Dawkins order. If an amount is zero, enter zero "0".

Differential Analysis

Reject Order (Alt. 1) or Accept Order (Alt. 2)

November 12, 2014

Reject Order (Alternative 1)

Accept Order (Alternative 2)

Differential Effect on Income (Alternative 2)

Revenues

$  

$  

$  

Costs:

Variable manufacturing costs

  

  

  

Income (Loss)

$  

$  

$  

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a. Follow Example Exercise 9-6. Subtract the additional costs from the additional revenues for accepting the order.

Learning Objective 1.

b. Having unused capacity available is SelectrelevantirrelevantCorrect 1 of Item 2  to this decision. The differential revenue is SelectmorelessCorrect 2 of Item 2  than the differential cost. Thus, accepting this additional business will result in a net SelectgainlossCorrect 3 of Item 2 .

c. What is the minimum price per unit that would produce a positive contribution margin? Round your answer to two decimal places.
$

a. Prepare a differential analysis on whether to reject (Alternative 1) or accept (Alternative 2) the Dawkins order. If an amount is zero, enter zero "0".

Differential Analysis

Reject Order (Alt. 1) or Accept Order (Alt. 2)

November 12, 2014

Reject Order (Alternative 1)

Accept Order (Alternative 2)

Differential Effect on Income (Alternative 2)

Revenues

$  

$  

$  

Costs:

Variable manufacturing costs

  

  

  

Income (Loss)

$  

$  

$  

Explanation / Answer

a) Statement showing Differential Analysis Particulars Reject Order Accept Order Diff Effect on income Revenues        1,890,000.00                2,466,000.00                           576,000.00 Costs: Variable Manu Costs        1,305,000.00                1,827,000.00                           522,000.00 Income            585,000.00                   639,000.00                             54,000.00 Accept order b) Relevant since due to unused capacity oppurtunity cost is nil Diff Revenue is more than diff cost Gain of $54,000 c) Minimum Price would be $29 or more to produce positive cont Margin

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