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 65,800 units, and current production is 44,300 units. Monthly fixed costs are $41,600, and variable costs are $25 per unit. The present selling price is $38 per unit. On November 12 of the current year, the company received an offer from Fields Company for 13,400 units of the product at $27 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 dated November 12 on whether to reject (Alternative 1) or accept (Alternative 2) the Fields order. If an amount is zero, enter zero "0". For those boxes in which you must enter subtracted or negative numbers use a minus sign.

b. Having unused capacity available is relevant to this decision. The differential revenue is less than the differential cost. Thus, accepting this additional business will result in a net gain .

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

Differential Analysis Reject Order (Alt. 1) or Accept Order (Alt. 2) November 12 Reject
Order
(Alternative 1) Accept
Order
(Alternative 2) Differential
Effect
on Income
(Alternative 2) Revenues $ $ $ Costs: Variable manufacturing costs Income (Loss) $ $ $

Explanation / Answer

a) Differential analysis :

b) Having unused capacity available is relevant to this decision. The differential revenue is higher than the differential cost. Thus, accepting this additional business will result in a net gain

c) Minimum price per unit is higher than 25 per unit

Reject
Order
(Alternative 1) Accept
Order
(Alternative 2) Differential
Effect
on Income
(Alternative 2) Revenue 0 13400*27 = 361800 361800 Costs Variable manufacturing costs 0 13400*25 = -335000 -335000 Income (loss) 0 26800 26800

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