Derek77
Oct 30, 2013, 07:05 PM
Hello!
I am currently studying for an exam and have the solution to my question but am somehow misunderstanding the reasons and mechanics to arrive at the solution. This is my question:
Klean Fiber Company is the creator of Y-Go, a technology that weaves silver into itsfabrics to kill bacteria and odor on clothing while managing heat. Y-Go has become verypopular as an undergarment for sports activities. Operating at capacity, the company canproduce 1,000,000 undergarments of Y-Go a year. The per unit and the total costs for anindividual garment when the company operates at full capacity are as follows.
Per Undergarment Total
Direct materials $2.00 $2,000,000Direct labor 0.75 750,000 Variable manufacturing overhead 1.00 1,000,000Fixed manufacturing overhead 1.50 1,500,000 Variable selling expenses 0.25 250,000Totals $5.50 $5,500,000The U.S. Army has approached Klean Fiber and expressed an interest in purchasing250,000 Y-Go undergarments for soldiers in extremely warm climates. The Army would paythe unit cost for direct materials, direct labor, and variable manufacturing overhead costs.In addition, the Army has agreed to pay an additional $1 per undergarment to cover allother costs and provide a profit. Presently, Klean Fiber is operating at 70% capacity anddoes 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 special order and should Leno Company accept the special order?
I will conclude that the answer is that it is not much of a business venture because Leno will breakeven at 250,000, therefore Leno should not take the answer.
I am currently studying for an exam and have the solution to my question but am somehow misunderstanding the reasons and mechanics to arrive at the solution. This is my question:
Klean Fiber Company is the creator of Y-Go, a technology that weaves silver into itsfabrics to kill bacteria and odor on clothing while managing heat. Y-Go has become verypopular as an undergarment for sports activities. Operating at capacity, the company canproduce 1,000,000 undergarments of Y-Go a year. The per unit and the total costs for anindividual garment when the company operates at full capacity are as follows.
Per Undergarment Total
Direct materials $2.00 $2,000,000Direct labor 0.75 750,000 Variable manufacturing overhead 1.00 1,000,000Fixed manufacturing overhead 1.50 1,500,000 Variable selling expenses 0.25 250,000Totals $5.50 $5,500,000The U.S. Army has approached Klean Fiber and expressed an interest in purchasing250,000 Y-Go undergarments for soldiers in extremely warm climates. The Army would paythe unit cost for direct materials, direct labor, and variable manufacturing overhead costs.In addition, the Army has agreed to pay an additional $1 per undergarment to cover allother costs and provide a profit. Presently, Klean Fiber is operating at 70% capacity anddoes 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 special order and should Leno Company accept the special order?
I will conclude that the answer is that it is not much of a business venture because Leno will breakeven at 250,000, therefore Leno should not take the answer.