Question

Decision on Accepting Additional Business Down Home Jeans Co. has an annual plant capacity of 63,600 units, and current production is 43,900 units. Monthly fixed costs are $38,200, and variable costs are $25 per unit. The present selling price is $34 per unit. On November 12 of the current year, the company received an offer from Fields Company for 14,100 units of the product at $27 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 (irrelevent or relevent) to this decision. The differential revenue is (more or less) than the differential cost. Thus, accepting this additional business will result in a net (gain or loss) .

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

Answer 1

• All working forms part of the answer
• Requirement ‘a’: Differential Analysis

Alternative 1: ACCEPT OFFER	Normal Business			Offer
	Units	per unit	Amount	Units	per unit	Amount	Total ($)
Sales Revenue	43900	34	1492600	14100	27	380700	1873300
(-) Variable cost	43900	25	1097500	14100	25	352500	1450000
Contribution margin	43900	9	395100	14100	2	28200	423300
(-) Fixed cost							38200
Net Income							$385100

Alternative 2: REJECT OFFER	Units	per unit	Amount
Sales Revenue	43900	34	1492600
(-) Variable cost	43900	25	1097500
Contribution margin	43900	9	395100
(-) Fixed cost			38200
Net Income			356900

Differential Revenues if offer is accepted = 1873300 – 1492600 = $380700
Differential Cost if offer is accepted = 1450000 – 1097500 = $352500
Differential Effect on Income = 380700-352500 = $28200

• Requirement ‘b’

Having unused capacity is RELEVANT to this decision. The differential Revenue is MORE than the differential cost. Thus, accepting this additional business will result in Net GAIN.

• Requirement ‘c’

Minimum price would be amount more than variable cost.

Variable cost is $25 per unit.

Hence, $26 per unit as minimum price would result in positive contribution.