Question

Decision on Accepting Additional Business

Homestead Jeans Co. has an annual plant capacity of 63,900 units, and current production is 46,700 units. Monthly fixed costs are $38,100, and variable costs are $25 per unit. The present selling price is $38 per unit. On November 12 of the current year, the company received an offer from Dawkins Company for 15,600 units of the product at $27 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)	$	$	$

Feedback

Subtract the additional costs from the additional revenues for accepting the order.

Learning Objective 1.

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

Answer a:

	Reject order	Accept order	Differential effect
Revenues	$              -	$ 421,200.00	$        421,200.00
Costs:
Variable manufacturing costs	$              -	$ 390,000.00	$        390,000.00
Income (Loss)	$              -	$   31,200.00	$          31,200.00

Answer b:

The order should be accepted.

Answer c:

Minimum price per unit = $ 25

Explanation;

As company is incurring $ 25 as variable cost, it needs to charge at least $ 25 per unit from the special order.

In case of any doubt, please feel free to comment.