Question

Decision on Accepting Additional Business

Down Home Jeans Co. has an annual plant capacity of 66,900 units, and current production is 45,000 units. Monthly fixed costs are $41,400, and variable costs are $25 per unit. The present selling price is $32 per unit. On November 12 of the current year, the company received an offer from Fields Company for 14,200 units of the product at $26 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)

Feedback

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

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

	Reject Order(Alt.1)	Accept Order(Alt.2)	Differential effect on Income
Revenues	$                                         -	$                                     369,200	$                                  369,200
Costs:
Variable manufvaturing costs	$                                         -	$                                    -355,000	$                                -355,000
Income (Loss)	$                                         -	$                                       14,200	$                                    14,200
Since there is a positive income when the order is accepted, the company should accept the offer
Any Price above the Variable cost per unit of $25 will result into a positive contribution margin.
So the Minimum transfer price would be $25.01