Country Jeans Co. has an annual plant capacity of 64,100 units, and current production is 45,000 units. Monthly fixed costs are $38,000, and variable costs are $25 per unit. The present selling price is $33 per unit. On November 12 of the current year, the company received an offer from Miller Company for 16,500 units of the product at $27 each. Miller 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 Country Jeans Co.
a. Prepare a differential analysis dated November 12 on whether to reject (Alternative 1) or accept (Alternative 2) the Miller 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 to this decision. The differential revenue is than the differential cost. Thus, accepting this additional business will result in a net .
c. What is the minimum price per unit that
would produce a positive contribution margin? Round your answer to
two decimal places.
$
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a. | ||||||
Reject Order | Accept Order | Differential income | Working | |||
Revenue | 0 | 445500 | 445500 | 16500*27 | ||
Costs: | ||||||
Variable Manufacturing cost | 0 | -412500 | -412500 | 16500*25 | ||
Income (Loss) | 0 | 33000 | 33000 | |||
b. | ||||||
Having unused capacity is RELEVANT to decision. The differential revenue is MORE than the differential cost. Thus, accepting this additional business will result in a net gain | ||||||
c. | ||||||
Variable Cost | $25 | per unit | ||||
to produce contribution margin, minimum price should be more than variable cost of $25. | ||||||
Hence minimum price of $25.01 will give positive contribution margin |
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