Webster Company is the creator of B-Go, a technology that weaves silver into its

Question

Webster Company is the creator of B-Go, a technology that weaves silver into its fabrics to kill bacteria and odor on clothing while managing heat. B-Go has become very popular as an undergarment for sports activities. Operating at capacity, the company can produce 1,000,000 undergarments of B-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 $2.00 $2,000,000

Direct labor 0.50 500,000

Variable manufacturing overhead 1.00 1,000,000

Fixed manufacturing overhead 1.25 1,250,000

Variable selling expenses 0.25 250,000

Totals $5.00 $5,000,000

The U.S. Army has approached Webster and expressed an interest in purchasing 210,000 B-Go undergarments for personnel 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 $1.00 per undergarment to cover all other costs and provide a profit. Presently, Webster is operating at 70 percent capacity and does not have any other potential buyers for B-Go. If Webster accepts the Army’s offer, it will not incur any variable selling expenses related to this order.

Explanation / Answer

$1.00 is additional benifit to Webser and accept the order.

Relavant Information;

1) currently Webstar company is working with idle capacity(i,e 700,000 garments only )

2) the contribution per unit $1.00 is positive.( Fixed cost is irrelevant)

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