Question

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 1,010,000 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 Undergarment			Total
Direct materials		$1.91			$1,929,100
Direct labor		0.41			414,100
Variable manufacturing overhead		0.96			969,600
Fixed manufacturing overhead		1.48			1,494,800
Variable selling expenses		0.31			313,100
Totals		$5.07			$5,120,700

The U.S. Army has approached Klean 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, 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		$enter revenues in dollars		$enter revenues in dollars		$enter revenues in dollars
Variable costs:
Direct materials		enter direct materials in dollars		enter direct materials in dollars		enter direct materials in dollars
Direct labor		enter direct labor in dollars		enter direct labor in dollars		enter direct labor in dollars
Variable overhead		enter variable overhead in dollars		enter variable overhead in dollars		enter variable overhead in dollars
Total variable costs		enter a subtotal of the three previous amounts		enter a subtotal of the three previous amounts		enter a subtotal of the three previous amounts
Net income		$enter net income in dollars		$enter net income in dollars		$enter net income in dollars

Should Klean Fiber accept the Army's offer?

Klean Fiber should select between accept and reject                                                          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		0		4.31*250000 = 1077500		1077500
Variable costs:
Direct materials		0		-477500		-477500
Direct labor		0		-102500		-102500
Variable overhead		0		-240000		-240000
Total variable costs		0		-820000		-820000
Net income		0		257500		257500

Should Klean Fiber accept the Army's offer?

Klean Fiber should accept the Army’s offer.