Exercise 21-4 Klean Fiber Company is the creator of Y-Go, a technology that weav
ID: 2543776 • Letter: E
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Exercise 21-4 Klean Fiber Company is the creator of Y-Go, a technology that weaves silver into its fabrics to kill bacteria and odor on clothing while managing heat. Y-Go has become very popular in undergarments for sports activities. Operating at capacity, the company can produce 1,088,000 Y-Go undergarments a year. The per unit and the total costs for an individual garment when the company operates at full capacity are as follows. Per Total Undergarment Direct materials Direct labor Variable manufacturing overhead Fixed manufacturing overhead Variable selling expenses $1.96 0.52 1.07 1.47 0.30 $5.32 $2,132,480 565,760 1,164,160 1,599,360 326,400 $5,788,160 Totals The U.S. Army has approached Klean Fiber and expressed an interest in purchasing 249,400 Y-Go undergarments for soldiers 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 $0.96 per undergarment to cover all other costs and provide a profit. Presently, Klean Fiber is operating at 70% capacity and does not have any other potential buyers for Y-Go. If Klean Fiber accepts the Army's offer, it will not incur any variable selling expenses related to this order. Prepare an incremental analysis for the Klean Fiber. (Enter negative amounts using either a negative sign preceding the number e.g.-45 or parentheses e.g. (45).) Reject Order Accept Order Net Income Increase (Decrease) Revenues 5.32 249.400 $ 1,326,808 Variable costs Direct materials Direct labor Variable overhead Total variable costs 1.96 249,400 488,824 0.52 249,400 Net income Should Klean Fiber accept the Army's offer? Klean Fiber should the Army's offer.Explanation / Answer
As companyis runnining on capacity of 70% & company has additional capacity 30% that is:
Additional Capacity =1088000*30% =326400
Fixed Manufacturing cost of 1,47 is sunk cost & will remain same if additional unit will be produced & Additional Variable sellng will not be occur in case of acceting the order .
Cost of Additional order of 249400 is 3.55 =1.96 +.52+ 1.07 (Direct Material + Direct Labor +Variable Manufacturing Overhead)
Additonal cost = 249400 * 3.55 = 885370
Additional Revenue will be 4.51 =1.96 +.52+ 1.07 +.96 (Direct Material + Direct Labor +Variable Manufacturing Overhead + Additional amount
Additional Revenue = 249400 *4.51 =1124794
Total Operating income will be =1124794 - 885370
=239424
If order of additional unit is accepted company will earn an additional revenue of 239424
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