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Accounting

27th Edition
WARREN + 5 others
ISBN: 9781337272094

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BuyFindarrow_forward

Accounting

27th Edition
WARREN + 5 others
ISBN: 9781337272094
Textbook Problem

Decision on accepting additional business

Homestead Jeans Co. has an annual plant capacity of 65.000 units, and current production is 45,000 units. Monthly fixed costs are $54,000, and variable costs are $29 per unit. The present selling price is $42 per unit. On November 12 of the current year, the company received an offer from Dawkins Company for 18,000 units of the product at $32 each. Dawkins 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 Homestead Jeans Co.

a. Prepare a differential analysis dated November 12 on whether to reject (Alternative 1) or accept (Alternative 2) the Dawkins order.

b. Briefly explain why accepting this additional business will increase operating income.

c. What is the minimum price per unit that would produce a positive contribution margin?

a)

To determine

Differential Analysis: Differential analysis refers to the analysis of differential revenue that could be gained or differential cost that could be incurred from the available alternative options of business.

To Prepare: The differential analysis of Company HJ on November 12, to decide whether to accept or reject the proposal.

Explanation

The differential analysis of Company HJ on November 12, for the given alternatives is shown below.

Differential Analysis of Company HJ
Reject Order (Alt. 1) or Accept Order (Alt. 2)
November 12
Reject Order  (Alternative 1) Accept Order  (Alternative 2) Differential Effect on income
Revenues $0 (1)      $576,000 $576,000
Costs:
   Variable manufacturing costs $0 (2)  (-)$522,000 (-)  $522,000
Income (loss) $0 $54,000...

b)

To determine

To Explain: The effect of accepting the additional business on the operating income.

c)

To determine
The minimum price which would generate a positive cotribution margin.

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