Decision on Accepting Additional Business Down Home Jeans Co. has an annual plan
ID: 2484053 • Letter: D
Question
Decision on Accepting Additional Business
Down Home Jeans Co. has an annual plant capacity of 64,800 units, and current production is 45,100 units. Monthly fixed costs are $39,200, and variable costs are $25 per unit. The present selling price is $35 per unit. On February 2, 2014, the company received an offer from Fields Company for 15,500 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.
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 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.
$
Hint(s)
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 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 .
Explanation / Answer
(a)
(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 that would produce a positive contribution margin is $36.51* for 45100 units * Sopporting calculatons : Fixed cost / PV ratio = $470,400 / (100 x 10/35) = $1,644,000 $1,644,000 is BEP sales value. Therefore for one unit price = $1,644,000 / 45,100 units = $36.51
Reject order Order for export Accept order Particulars Working Amount ($), except units Amount ($), except units Wkg. Amount ($), except units Total Cash flow in order accepted Increamental Cash Flow ($) a b c d e f g h= e+g i= h-e A a)Sales in unit 1 45,100 15,500 b)Sales price per unit 35 35 29 c)Sales value (a xb) 35 1,578,500 449,500 2,028,000 449,500 B Variabble cost ( a x $25) 25 1,127,500 a x $25 387,500 1,515,000 387,500 C Contribution (A-B) (A-B) 10 451,000 62,000 513,000 62,000 D Fixed Cost 39200 x 12 470,400 470,400 E Operation Income (C - D) (19,400) 62,000 42,600 62,000
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