Question

Country Jeans Co. has an annual plant capacity of 65,100 units, and current production is 45,300 units. Monthly fixed costs are $40,600, and variable costs are $25 per unit. The present selling price is $33 per unit. On February 2 the company received an offer from Miller Company for 15,900 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 February 2 on whether to reject (Alternative 1) or accept (Alternative 2) the Miller order. If an amount is zero, enter zero "0". Differential Analysis Reject Order (Alt. 1) or Accept Order (Alt. 2) February 2 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. $

Answer 1

Answer a.

COUNTRY JEANS CO.

Statement of Differnetial Analysis

of Order from Fields Company

Alternative 1 Alternative 2 Differntial Analysis

Reject the Order Accept the Order

Sales 1,494,900 1,924,200 429,300

Alt. 1 - 45,300 Units X $33

Alt. 2 - 45,300 Units X $33 + 15,900 Units X $27

Less: Variable Manufacturing Costs 1,132,500 1,530,000 397,500

Alt. 1 - 45,300 Units X $25

Alt. 2 - 61,200 Units X $25

Contribution / Income 362,400 394,200 31,800

The Country Jeans Co. should Accept the Order of Miller Co. as it will increase its profit by $31,800

Answer b.

Yes, the unused capacity is relevant in decision making. If the capacity is fully utilized, then we have to incur more Fixed Cost to increase the Capacity or loose the domestic sales for the special order of Millers Co.

Answer c.

Minium Price per Unit that will contribute positive Contribution Margin = Price more the $25 per Unit

(Variable Cost Per Unit)