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 1,053,000 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 | $1.96 | $2,063,880 | ||||
Direct labor | 0.47 | 494,910 | ||||
Variable manufacturing overhead | 0.98 | 1,031,940 | ||||
Fixed manufacturing overhead | 1.41 | 1,484,730 | ||||
Variable selling expenses | 0.38 | 400,140 | ||||
Totals | $5.20 | $5,475,600 |
The U.S. Army has approached Klean Fiber and expressed an interest
in purchasing 249,700 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 $1.01 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. |
Reject | Accept | net income | |||||
order | order | increase | |||||
(decrease) | |||||||
Revenues | (1.96+.47+.98+1.01)*249700 | 1,103,674 | 1,103,674 | ||||
Variable costs: | |||||||
Direct materials | (1.96*249700) | 489412 | -489412 | ||||
direct labor | (.47*249700) | 117359 | -117359 | ||||
Variable overhead | (.98*249700) | 244706 | -244706 | ||||
total variable costs | 851477 | -851477 | |||||
net income | 252,197 | 252,197 | |||||
Accept | |||||||
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