Question

Klean Fiber Company is the creator of Y-Go, a technology that weaves silver into its fabrics...

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.

Homework Answers

Answer #1
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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