Question

Decision on Accepting Additional Business

Homestead Jeans Co. has an annual plant capacity of 65,600 units, and current production is 46,600 units. Monthly fixed costs are $41,500, and variable costs are $25 per unit. The present selling price is $32 per unit. On November 12 of the current year, the company received an offer from Dawkins Company for 13,700 units of the product at $28 each. Dawkins 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 Homestead Jeans Co.

a. Prepare a differential analysis dated November 12 on whether to reject (Alternative 1) or accept (Alternative 2) the Dawkins order. If an amount is zero, enter "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) $ $ $

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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? Round your answer to two decimal places.
$

Answer 1

	Alternative 1	Alternative 2
	Reject Order	Accept Order	Difference
Total units sold	46,600	60,300	13,700
Domestic sales (46600*32)	1,491,200	1,491,200
International sales (13700*28)		383,600
Total sales	1,491,200	1,874,800	383,600
Less: variable cost (Total units sold * 25)	1,165,000	1,507,500	342,500
Contribution margin	326,200	367,300	41,100
Less: fixed cost	41,500	41,500	-
Net income	284,700	325,800	41,100
Alternative 2 is Selected because net income increased by 41100 by additional sales of 13700 units.
What is the minimum price per unit that would produce a positive contribution margin?
Variable cost per unit is 25. Minimum selling price is 25 that would produce a positive Contribution margin.