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.
$
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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