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 1,083,000 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 $2.05 $2,220,150 Direct labor 0.46 498,180 Variable manufacturing overhead 1.03 1,115,490 Fixed manufacturing overhead 1.48 1,602,840 Variable selling expenses 0.33 357,390 Totals $5.35 $5,794,050 The U.S. Army has approached Klean Fiber and expressed an interest in purchasing 249,500 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 $1.09 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.
Solution :
Price offered by US army = $2.05 + $0.46 + $1.03 + $1.09 = $4.63
| Differential Analysis - Reject Order (alt 1) or Accept Order (Alt2) - Klean fiber company | |||
| Particulars | Reject Order (Alt 1) | Accept order (Alt 2) | Net Income Increase (Decrease) (Alt 2) |
| Revenues | $0.00 | $1,155,185.00 | $1,155,185.00 |
| Variable Costs: | |||
| Direct material | $0.00 | $511,475.00 | $511,475.00 |
| Direct labor | $0.00 | $114,770.00 | $114,770.00 |
| Variable manufacturing overhead | $0.00 | $256,985.00 | $256,985.00 |
| Total variable cost | $0.00 | $883,230.00 | $883,230.00 |
| Net Income | $0.00 | $271,955.00 | $271,955.00 |
As income will increase by $271,955 on accepting special order, therefore Fiber should accept the army offer.
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