Question

6

Decision on Accepting Additional Business

Down Home Jeans Co. has an annual plant capacity of 64,700 units, and current production is 44,500 units. Monthly fixed costs are $40,600, and variable costs are $25 per unit. The present selling price is $36 per unit. On November 12 of the current year, the company received an offer from Fields Company for 13,100 units of the product at $26 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.

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

Solution a)

	Reject order	Accept Order	Differential Effect on Income
	Alternative 1	Alternative 2	Alternative 2
Units Sold	44,500.00	44500+13100 = 57600	13,100.00
Selling Price per Unit $	36.00	44500 @ $36 per unit 13100 @ $26 per Unit
Revenue	16,02,000.00	19,42,600.00	3,40,600.00
Costs:
Variable Manufacturing Cost $25 per Unit $	11,12,500.00	14,40,000.00	3,27,500.00
Contribution $	4,89,500.00	5,02,600.00	13,100.00
Fixed Cost $	40,600.00	40,600.00	0.00
Income	4,48,900.00	4,62,000.00	13,100.00

Solution b:

The differential revenue is greater than the differential cost Thus, accepting additional business will result in aditional Net Profit of $13,100

Solution c:

Minimum selling price to produce a positive contribution margin will be equal to the Variable Cost of Manufacturing = $25.01

As at $25 there will be no profit no loss situation for additional sales.