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Inbox-osmanlea10724@. × engageBrain- https://s c cengagenow.com/ilrn/takeAssignment takeAssignmentMan.do?invoker-saved&takeAssignmentSessionLocator;=assignment take _ Desire earn BC On Facebook Facebook l .com | Find Decision on Accepting Additional Business Down Home Jeans Co. has an annual plant capacity of 63,100 units, and current production is 43,500 units. Monthly fixed costs are $41,500, and variable costs are $25 per unit. The present selling price is $32 per unit. On February 2, 2014, the company received an offer from Fields Company for 16,000 units of the product at $27 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 8. 9. of sales of Down Home Jeans Co 10. Hide Hint(s) a. Prepare a differential analysis on whether to reject (Alternative 1) or accept (Alternative 2) the Fields order. If an amount is zero, enter zero "o". Differential Analysis Reject Order (Alt.1) or Accept Order (Alt. 2) February 2,2014 Reject Order (Alternative 1) Accept Order (Alternative 2) Differential Effect on Income (Alternative 2) Revenues 1,392,000 1,824,000 432,000 Costs: Variable manufacturing costs 1,087,500 1,487,500 -400,000 Income (Loss) 304,500 336,500 32,000 Hide Feedback Partially Correct Check Feedback a. Follow Example Exercise 25-6. Subtract the additional costs from the additional revenues for accepting the order, Learning Objective 1 b. Having unused capacity available isl irrelevant to this decision. The differential revenue is more v than the differential cost. Thus 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 25 Hide Feedback 9:13 AM 7/23/2016 Ask me anythingExplanation / Answer
Down Home Jeans Company has the capacity to make another 63100 - 45500 = 17600 units in the next two months of February and March before the end of the financial year. If the company accepts the order the total revenue would be as follows:
Revenues = (32 x 17600) + (32 x 15000) = $1043200
Costs = (2 x 41500) + (17600 x 25) + (15000 x 27) = 83000 + 440000 + 405000 = $928000
Profit = 1043200 - 928000 = $115200
If the company rejects the offer then the profit would be
Profit = 563200 - 523000 = $40200
Unused capacity is relevant because it involves monthly fixed cost. If the fixed cost was annual then it would have been irrelevant because the company any which ways were going to incur it.
Minimum price per unit that would produce a positive contribution margin will be Cost per unit for producing those 15000 additional units
Cost per unit = (83000 + 375000) / 15000 = $30.5