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

Question

Decision on Accepting Additional Business

Down Home Jeans Co. has an annual plant capacity of 66,600 units, and current production is 44,400 units. Monthly fixed costs are $40,800, and variable costs are $25 per unit. The present selling price is $32 per unit. On February 2, 2014, the company received an offer from Fields Company for 15,300 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.
$

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)

$  

$  

$  

Explanation / Answer

Solution a.:

Solution b.:

Having unused capacity available is relevant to this decision as the additional units can be produced without effecting current production.

The Differential revenue is more than the Differencial Cost. Thus, accepting this additional business will result in a net gain.

Solution c.:

A positive Contribution margin will be produced at a price equal to the variable cost per unit. therefore Minimum price per unit to produce a positive contribution margin = $25

Differential Analysis - Reject Order (alt 1) or Accept Order (Alt2) Feb 2, 2014 Particulars Reject Order (Alt1) Accept Order (Alt2) Differential effect on income (Alt 2) Details Amount Details Amount Revenue 44400*32 $14,20,800.00 [(44400*$32) + (15300*$29)] $18,64,500.00 $4,43,700.00 Costs: Variable Manufacturing Costs 44400*25 $11,10,000.00 (44400+15300)*$25 $14,92,500.00 $3,82,500.00 Income / (Loss) $3,10,800.00 $3,72,000.00 $61,200.00

Related Questions

Navigate

• Browse (All)
• Browse D
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.