Question

Homestead Jeans Co. has an annual plant capacity of 63,600 units, and current production is 42,300 units. Monthly fixed costs are $50,100, and variable costs are $30 per unit. The present selling price is $43 per unit. On November 12 of the current year, the company received an offer from Dawkins Company for 18,900 units of the product at $31 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.

	Required:
A.	Prepare a differential analysis dated November 12 on whether to reject (Alternative 1) or accept (Alternative 2) the Dawkins order. Refer to the lists of Labels and Amount Descriptions for the exact wording of the answer choices for text entries. For those boxes in which you must enter subtracted or negative numbers use a minus sign. If there is no amount or an amount is zero, enter "0". A colon (:) will automatically appear if required.
B.	Briefly explain the reason why accepting this additional business will increase operating income.
C.	What is the minimum price per unit that would produce a positive contribution margin? If required, round your answer to two decimal places.

Answer 1

Answer to Question 1:-

	Differential Analysis
	12-Nov
Particulars	Reject Order(Alternative 1)	Accept Order(Aternative 2)	Differential Effect on Income(Alternative 2)
Revenue	$0	$585,900	$585,900
Costs:
Variable Manufacturing Costs	$0	$567,000	$567,000
Income(Loss)	$0	$18,900	$18,900
Working Note:
1.18900 units x $31 per unit
2. 18900 units x $30 per unit

Answer to Question 2:-

The additional units can be sold for $ 31each, and since there is unused capacity available, the only cost that would be added if this additional production were accepted are the variable cost of $30 per unit. The differential revenue is therefore $31 per unit and the differential cost is $30 per unit. Thus the net gain is $1per unit X 18,900 units or $18900

Answer to Question 3:-

Any selling price above $30(variable cost per unit ) will produce a positive contribution margin.