Question

Exercise 20-4

Klean 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 1,055,000 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 Undergarment			Total
Direct materials		$2.01			$2,120,550
Direct labor		0.43			453,650
Variable manufacturing overhead		0.99			1,044,450
Fixed manufacturing overhead		1.52			1,603,600
Variable selling expenses		0.31			327,050
Totals		$5.26			$5,549,300

The U.S. Army has approached Klean Fiber and expressed an interest in purchasing 250,500 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 $1.06 per undergarment to cover all other costs and provide a profit. Presently, Klean Fiber is operating at 70% capacity and does not have any other potential buyers for Y-Go. If Klean Fiber accepts the Army’s offer, it will not incur any variable selling expenses related to this order.

Prepare an incremental analysis for the Klean 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 Klean Fiber accept the Army's offer?

Klean Fiber should

rejectaccept

the Army’s offer.

Answer 1

Prepare an incremental analysis for the Klean 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		$		$4.49*250500 = 1124745		$1124745
Variable costs:
Direct materials				-503505		-503505
Direct labor				-107715		-107715
Variable overhead				-247995		-247995
Total variable costs				-859215		-859215
Net income		$		$265530		$265530

Klean Fiber should accept the Army's offer