Decision on Accepting Additional Business Down Home Jeans Co. has an annual plan
ID: 2468414 • Letter: D
Question
Decision on Accepting Additional Business Down Home Jeans Co. has an annual plant capacity of 67,000 units, and current production is 46,000 units. Monthly fixed costs are $40,000, and variable costs are $25 per unit. The present selling price is $36 per unit. On February 2, 2014, the company received an offer from Fields Company for 15,100 units of the product at $29 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. Hide a. Prepare a differential analysis on whether to reject (Alternative 1) or accept (Alternative 2) the Fields order. If an amount is zero, enter zero "0". Differential Analysis Reject Order (Alt. 1) or Accept Order (Alt. 2) February 2, 2014 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 Selectrelevantirrelevant to this decision. The differential revenue is Selectmoreless than the differential cost. Thus, accepting this additional business will result in a net Selectgainloss. c. What is the minimum price per unit that would produce a positive contribution margin? Round your answer to two decimal places. $
Explanation / Answer
Answer a. Home Jeans Co. Statement of Differnetial Analysis of Order from Fields Company Alternative 1 Alternative 2 Differntial Analysis Reject the Orde Accept the Order Sales 1,656,000 2,093,900 437,900 Alt. 1 - 46000 Units X $36 Alt. 2 - 46000 Units X $36 + 15100 Units X $29 Less: Variable Manufacturing Costs 1,150,000 1,527,500 377,500 Alt. 1 - 46000 Units X $25 Alt. 2 - 61100 Units X $25 Contribution / Income 506,000 566,400 60,400 The Home Jeans Co. should Accept the Order of Fields Co. as it will increase its profit by $60400. Answer b. Yes, the unused capacity is relevant in decision making. If the capacity is fully utilized, then we have to incur more Fixed Cost to increase the Capacity or loose the domestic sales for the special order of Fields Co. Answer c. Minium Price per Unit that will contribute positive Contribution Margin = Price more the $25 per Unit (Variable Cost Per Unit)
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