Question

1. Decision on Accepting Additional Business

   Country Jeans Co. has an annual plant capacity of 66,400 units, and current production is 46,000 units. Monthly fixed costs are $38,500, 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 Miller Company for 16,100 units of the product at $27 each. Miller 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 Country Jeans Co.

   a. Prepare a differential analysis dated November 12 on whether to reject (Alternative 1) or accept (Alternative 2) the Miller 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   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.
   $

Check My Work2 more Check My Work uses remaining.

Answer 1

As given in the question, Country Jeans Co.has an addition capacity of 20,400 units ( 66,400-46,000 units) which means that the fixed cost, which is at present $ 38,500 monthly, would not change if this additional capacity is utilised.

Now, Country Jeans Co has received an order from Miller Company to produce 16,100 units at the selling price of $ 27 per unit which is comparatively less than the present selling price of $ 38 per unit. There are two alternatives in front of the company, first one is to accept the order and second is to reject the order, keeping in consideration the effect on income.

a. Differential analysis to decide whether the order must be accepted or rejected:

	Reject order (Alternative 1)	Accept order (Alternative 2)	Differential effect on income
Revenues	$ 1,748,000	$ 2,182,700 (1)	$ 434,700
Costs
Variable manufacturing costs	($ 1,150,000)	($ 1,552,500) (2)	($ 402,500)
Income/ (loss)	$ 598,000	$ 630,200	$ 32,200

This shows that there would be an additional income of $ 32,000 if Country Jeans Co accepts the order of Miller company of producing 16,100 units at the selling price of $ 27 per unit.

Fixed cost has not been taken in the differential analysis as it will remain same for both the Alternatives.

Working notes:

(1) Revenue in Alternative 2: 46,000*$38 + 16,100*$27 = $ 2,182,700

(2) Variable cost in Alternative 2: 46,000*$25 + 16,100*$25 = $ 1,552,500

b. Having unused capacity available is important factor to this decision. The differential revenue is greater than the differential cost. Thus, accepting this additional business will result in a net Income.

c. Contribution margin is the difference between selling price per unit and variable cost per unit

Minimum selling price to produce a positive contribution margin:

Since fixed cost will remain same till the full capacity is utilised, company need to recover only the variable cost to earn contribution margin. Therefore selling price greater than $ 25 per unit will lead to positive contribution. Minimum selling price = $ 25.01 ( any amount greater than $ 25 per unit )