Question

LAELEZO Sheridan Fiber Company is the creator of Y-Go, a technology that weaves silver into its fabrics to kill bacteria and odor on clothing while managing heat. Y-Go has become very popular in undergarments for sports activities. Operating at capacity, the company can produce 1,010,000 Y-Go undergarments a year. The per unit and the total costs for an individual garment when the company operates at full capacity are as follows. Per Total Undergarment $1.91 0.41 Direct materials Direct labor Variable manufacturing overhead Fixed manufacturing overhead Variable selling expenses 0.96 $1,929,100 414,100 969,600 1,494,800 313,100 $5,120,700 1.48 0.31 Totals $5.07 The U.S. Army has approached Sheridan Fiber and expressed an interest in purchasing 250,000 Y-Go undergarments for soldiers in extremely warm climates. The Army would pay the unit cost for direct materials, direct labor, and variable manufacturing overhead costs. In addition, the Army has agreed to pay an additional $1.03 per undergarment to cover all other costs and provide a profit. Presently, Sheridan Fiber is operating at 70% capacity and does not have any other potential buyers for y-Go. If Sheridan Fiber accepts the Army's offer, it will not incur any variable selling expenses related to this order. Prepare an incremental analysis for the Sheridan Fiber. (Enter negative amounts using either a negative sign preceding the number e.g. -45 or parentheses e.g. (45).) Reject Order Accept Order Net Income Increase (Decrease) Revenues Variable costs: Direct materials Direct labor Variable overhead Total variable costs Net income Should Sheridan Fiber accept the Army's offer? Sheridan Fiber should the Army's offer

Answer 1

incremental analysis is the method of analyzing the available alternatives in terms of cost and revenue.All the relevant data are compared and best decision is taken.

if offer is rejected there will no incremental cost or revenue.

Fixed costs and variable selling costs are irrelevant as they will not increase on acceptance of offer.

selling price =1.91+0.41+0.96+1.03=4.31

	reject order	accept order	Net income increase (Decrease)
Revenues	0	1,077,500[250000*4.31]	1,077,500
Variable costs:
Direct material	0	(477,500)[250000*1.91]	(477,500)
Direct labor	0	(102,500)[250000*0.41]	(102,500)
Variable overhead	0	(240,000)[250000*0.96]	(240,000)
Total variable cost	0	(820,000)	(820,000)
Net income	0	257,500	257,500

Yes sheridan fiber should accept the army's offer.

as it results in incremental income of $257,500.