Klean Fiber Company is the creator of Y-Go, a technology that weaves silver into

Question

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 1,053,000 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.

The U.S. Army has approached Klean Fiber and expressed an interest in purchasing 249,700 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 $1.01 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

Per Undergarment Total Direct materials $1.96 $2,063,880 Direct labor 0.47 494,910 Variable manufacturing overhead 0.98 1,031,940 Fixed manufacturing overhead 1.41 1,484,730 Variable selling expenses 0.38 400,140    Totals $5.20 $5,475,600

Explanation / Answer

Statement showing incremental profit from taking order Accept Order Reject Order Incremental   Particulars Per unit Units Amount Units Amount Amount Sales - Normal {Wn - 1 & 2)                   7.42     7,37,100.00    54,65,839.00 7,37,100.00    54,65,839.00                        -   Sales - Army {WN - 3}                   4.42     2,49,700.00    11,03,674.00                     -                            -   11,03,674.00 Total     9,86,800.00    65,69,513.00    54,65,839.00 11,03,674.00 Less: Variable Direct Material                   1.96     9,86,800.00    19,34,128.00 7,37,100.00    14,44,716.00     4,89,412.00 Direct Labour                   0.47     9,86,800.00       4,63,796.00 7,37,100.00       3,46,437.00     1,17,359.00 Variable Manufacturing overheads                   0.98     9,86,800.00       9,67,064.00 7,37,100.00       7,22,358.00     2,44,706.00 Variable Selling                     0.38     7,37,100.00       2,80,098.00 7,37,100.00       2,80,098.00                        -   Total Variable expenses    36,45,086.00    27,93,609.00     8,51,477.00 Contribution    29,24,427.00    26,72,230.00     2,52,197.00 Less: Fixed    14,84,730.00    14,84,730.00                        -   Profit    14,39,697.00    11,87,500.00     2,52,197.00 WN:1 computation of Sales per unit at 70% cap Total Fixed 14,84,730.00 Total Variable (3.79*737100) 27,93,609.00 Total Cost 42,78,339.00 Profit 11,87,500.00 Total Sales value Req 54,65,839.00 Total Units @ 70%     7,37,100.00 Sales price per unit                   7.42 WN:2 Computation of Capacity Total Capacity 10,53,000.00 Current utilisation 70% Current utilisation in units     7,37,100.00 Unutilised capacity     3,15,900.00 Army Order     2,49,700.00 Balance Cap        66,200.00 WN:2 Computation of Price per unit of new order Direct Material                   1.96 Direct Labour                   0.47 Variable Manufacturing overheads                   0.98 Profit & Other costs                   1.01                   4.42

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