Question

Homestead Jeans Co. has an annual plant capacity of 65,500 units, and current production is 43,000 units. Monthly fixed costs are $38,000, and variable costs are $25 per unit. The present selling price is $37 per unit. On November 12 of the current year, the company received an offer from Dawkins Company for 13,600 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)	$	$	$

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.

Calgary Lumber Company incurs a cost of $392 per hundred board feet (hbf) in processing certain “rough-cut” lumber, which it sells for $546 per hbf. An alternative is to produce a “finished cut” at a total processing cost of $529 per hbf, which can be sold for $754 per hbf.

a. Prepare a differential analysis dated March 15, on whether to sell rough-cut lumber (Alternative 1) or process further into finished-cut lumber (Alternative 2).

Differential Analysis
Sell Rough-Cut (Alt. 1) or Process Further into Finished-Cut (Alt. 2)
March 15
	Sell Rough-Cut (Alternative 1)	Process Further into Finished-Cut (Alternative 2)	Differential Effect on Income (Alternative 2)
Revenues, per unit	$	$	$
Costs, per unit
Income (Loss), per unit	$	$	$

Answer 1

1) a) Annual plant capacity = 65,500 units

Current production = 43,000 units

Excess capacity = 65,500 units - 43,000 units = 22,500 units

The dawkins company's order is for 13,600 units and the homestead jeans co. has an excess capacity of 22,500 units, therefore the acceptance of offer will not increase any fixed cost.

Differential analysis of accepting or rejecting the order is shown as follows:-

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	$0	(13,600 units*$27) = $367,200	$367,200
Costs:
Variable manufacturing costs	$0	(13,600 units*$25) = ($340,000)	($340,000)
Income (Loss)	$0	$27,200	$27,200

b) The differential revenue is more than the differential cost. Thus, accepting this additional business will result in a net income of $27,200.

c) The contribution margin is equal to sales minus variable cost. The minimum price per unit that would produce a positive contribution margin will be equal to variable costs per unit (i.e. $25 per unit in this case).

2) a)

Differential Analysis
Sell Rough-Cut (Alt. 1) or Process Further into Finished-Cut (Alt. 2)
March 15
	Sell Rough-Cut (Alternative 1)	Process Further into Finished-Cut (Alternative 2)	Differential Effect on Income (Alternative 2)
Revenues, per unit	$546	$754	$208
Costs, per unit	($392)	($529)	($137)
Income (Loss), per unit	$154	$225	$71