Question

Monty 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 1,065,000 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 $1.92 $2,044,800

Direct labor 0.43 457,950

Variable manufacturing overhead 1.02 1,086,300

Fixed manufacturing overhead 1.53 1,629,450

Variable selling expenses 0.37 394,050

Totals $5.27 $5,612,550

The U.S. Army has approached Monty and expressed an interest in purchasing 249,000 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 $1.09 per undergarment to cover all other costs and provide a profit. Presently, Monty is operating at 70% capacity and does not have any other potential buyers for Y-Go. If Monty accepts the Army’s offer, it will not incur any variable selling expenses related to this order.

Prepare an incremental analysis for the Monty. (If amount decreases net income then enter the amount using either a negative sign preceding the number e.g. -45 or parentheses e.g. (45).)

Answer 1

Incremental analysis:

	reject	accept	net income increase/(decrease)
Revenues	0	4.46*249000 =$ 1,110,540	$ 1,110,540
costs	0	3.37*249,000 = $839,130	-$839,130
Net income	0	$ 271,410	$ 271,410

Cost = Direct material + direct labor + variable overhead = 1.92 +0.43 +1.02 = $ 3.37

Revenue per unit = Cost + profit per undergarment = 3.37+ 1.09 = $ 4.46

Note that fixed overhead and selling expenses are not relevant cost here and not considered.

Conclusion

Monty shall accept the offer as there is rise in net income by $ 271,410.

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