Question

Decision on Accepting Additional Business Madison Industries Inc. has an annual plant capacity of 631,000 units,...

Decision on Accepting Additional Business

Madison Industries Inc. has an annual plant capacity of 631,000 units, and current production is 447,000 units. Monthly fixed costs are $417,000, and variable costs are $25 per unit. The present selling price is $35 per unit. The company received an offer from Story Mills Company for 15,000 units of the product at $28 each. Story Mills 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 Madison Industries Inc.

a. Prepare a differential analysis report for the proposed sale to Story Mills Company.

Madison Industries Inc.
Sell to Story Mills Company
Differential Analysis Report
Differential revenue from accepting the offer:
Revenue from sale of additional units $
Differential cost of accepting the offer:
Variable costs from sale of additional units
Differential income from accepting the offer $

b. Madison Inc. should:
accept this additional business since the differential revenue is greater than the differential cost per unit.

c. What is the minimum price per unit that would produce a contribution margin? Round your answer to the nearest cent.
$

Homework Answers

Answer #1

a.

Madison Industries Inc.
Sell to Story Mills Company
Differential Analysis Report
Differential revenue from accepting the offer:
Revenue from sale of additional units 420000 [15000*28]
Differential cost of accepting the offer:
Variable costs from sale of additional units 375000 [15000*25]
Differential income from accepting the offer 45000

b.  Madison Inc. should accept this additional business since the differential revenue is greater than the differential cost per unit.

c. Minimum price per unit = $25.01 [ 25 +0.1]

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