Question

Decision on Accepting Additional Business

Country Jeans Co. has an annual plant capacity of 63,100 units, and current production is 44,500 units. Monthly fixed costs are $41,400, and variable costs are $25 per unit. The present selling price is $33 per unit. On November 12 of the current year, the company received an offer from Miller Company for 14,800 units of the product at $26 each. Miller 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 Country Jeans Co.

a. Prepare a differential analysis dated November 12 on whether to reject (Alternative 1) or accept (Alternative 2) the Miller 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.

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)	$	$	$

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

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

Answer 1

a. Prepare a differential analysis

Differential Analysis
Reject Order (Alt. 1) or Accept Order (Alt. 2)
12-Nov
	Reject	Accept	Differential
	Order	Order	Effect
	(Alternative 1)	(Alternative 2)	on Income
			(Alternative 2)
Revenues	0	384800	384800
Costs:
Variable manufacturing costs	0	370000	-370000
Income (Loss)	0	14800	14800

Working notes for the above answer is as under

1

Revenues

=14800x26

=384800

2

Variable manufacturing cost

=14800x25

=370,00

__________________________________________________________

b.

Having unused capacity available is __relevant__________ to this decision. The differential revenue is_____more____ 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?

Answer:$25.01

Explanation:

price Above the variable cost give positive contribution