Question

Decision on Accepting Additional Business

Homestead Jeans Co. has an annual plant capacity of 66,400 units, and current production is 45,400 units. Monthly fixed costs are $39,700, and variable costs are $25 per unit. The present selling price is $34 per unit. On November 12 of the current year, the company received an offer from Dawkins Company for 15,400 units of the product at $29 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)	$	$	$

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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.
$

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Answer 1

Solution a:

Differential Analysis
Reject Order (Alt. 1) or Accept Order (Alt. 2)
Nov-12
	Reject Order (Alternative 1)	Accept Order (Alternative 2)	Differential Effect on Income (Alternative 2)
Revenues (15400*$29)	$0	$4,46,600	$4,46,600
Costs:
Variable manufacturing costs ($15400*$25)	$0	-$3,85,000	-$3,85,000
Income (Loss)	$0	$61,600	$61,600

Solution b:

Having unused capacity available is relevant to this decision. The differential revenue is more than the differential costs. Thus, accepting this additional business will result in a net gain.

Solution c:

Minimum price per unit = $25.01