Klean Fiber Company is the creator of YGo a technology that

Klean Fiber 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 as an undergarment for sports activities. Operating at capacity, the company can produce 1.,053,800 undergarments of Y-Go a year. The per unit and the total costs for an individual garment when the company operates at full capacity are as follows. Total Undergarment Direct materials Direct labor Variable manufacturing overhead Fixed manufacturing overhead Variable selling expenses $2.08 0.41 1.01 1.50 0.31 $5.31 $2,191,904 432,058 1,064,338 1,580,700 326,678 $5,595,678 Totals The U.S. Army has approached Klean Fiber and expressed an interest in purchasing 249,100 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 $1:05 per undergarment to cover all other costs and provide a profit. Presently, Kean Fiber is operating at 70% capacity and does not have any other potential buyers for Y-Go. If Kean Fiber accepts the Army\'s offer, it will not incur any variable selling expenses related to this order Prepare an incremental analysis for the Klean Fiber. (Enter negative amounts using either a negative sign preceding the number e.g. -45 or parentheses e.g. (45).) Reject Order Accept Order Net Income Increase (Decrease) Revenues Vanable costs: Direct materials Direct labor Variable overhead Total variable costs Net income Should Klean Fiber accept the Army\'s offer?

Solution

Klean Fiber should accept the Army\'s offer since it will result in an increase in net income of $261555.

Working:

Current operating level = 70% x 1053800 = 737660

Available capacity = 30% x 1053800 = 316140

Klean Fiber has sufficient available capacity to accept the order.

	Reject Order	Accept Order	Net income increase (decrease)
Revenues	0	1133405	1133405
Variable costs:
Direct materials	0	518128	-518128
Direct labor	0	102131	-102131
Variable overhead	0	251591	-251591
Total variable costs	0	871850	871850
Net income	0	261555	261555