Question

Decision on Accepting Additional Business Homestead Jeans Co. has an annual plant capacity of 66,000 units, and current production is 44,300 units. Monthly fixed costs are $39,100, 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 Dawkins Company for 16,600 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) $ $ $

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

a. The company is already producing and selling 44,300 units @ $38 each.

Excess (un-used) capacity of the company = 66000 - 44300 = 21700 units ( which is sufficient for the new order.)

Hence there is NO opportunity cost incurred due to the acceptance of the order.

PARTICULARS	ACCEPT ORDER	REJECT ORDER	DIFFERENCE
Sales	$2164800	$1683400	$481400
Less: Variable costs	$1522500	$1107500	$415000
Less: Fixed cost	$469200	$469200	NIL
Total profit	$173100	$106700	$66400

The company should accept the offer as it generates extra profit of $66400.

b. We have unused capacity available is for this decision. The differential revenue is more than the differential cost. Thus, accepting this additional business will result in a net profit of $66400.

c.The minimum price per unit that would produce a positive contribution margin for the order of 16600 units = The variable costs incurred per unit = $25. (This would be the break even price for the said 16600 units )

This is because the fixed costs are already covered by the normal production and sales.