Question

1. decision on Accepting Additional Business

   Down Home Jeans Co. has an annual plant capacity of 66,400 units, and current production is 43,100 units. Monthly fixed costs are $39,400, 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 Fields Company for 14,700 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 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)	$	$	$

   b. Having unused capacity available is _____ (relevant or irrelevant) to this decision. The differential revenue is _____ (more or less) than the differential cost. Thus, accepting this additional business will result in a net ____ (gain or loss) .

   c. What is the minimum price per unit that would produce a positive contribution margin? Round your answer to two decimal places.
   $

Answer 1

Diffential analysis
		reject order	accept order	differential effect on income
revenues		0	396900	396900
cost:
variable manufacturing cost		0	-367500	-367500
income (loss)		0	29400	29400
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) minimum price per unit that would produce a positive contribution margin = 25.01

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