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 1,025,400 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. Per Undergarment Total Direct materials $1.96 $2,009,784 Direct labor 0.41 420,414 Variable manufacturing overhead 1.03 1,056,162 Fixed manufacturing overhead 1.57 1,609,878 Variable selling expenses 0.34 348,636 Totals $5.31 $5,444,874 The U.S. Army has approached Klean Fiber and expressed an interest in purchasing 249,600 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 $1.01 per undergarment to cover all other costs and provide a profit. Presently, Klean Fiber is operating at 70% capacity and does 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 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 $ $ $ Variable costs: Direct materials Direct labor Variable overhead Total variable costs Net income $ $ $ Should Klean Fiber accept the Army\'s offer?

Solution

Klin Fibre Company Incremental Analysis Reject Order Accept Order Increase/Decrease in Net Income * Revenue(249600*4.41) $                               -   $           11,00,736.00 $                                             11,00,736.00 Variable Cost Direct Material(249600*1.96) $                               -   $             4,89,216.00 $                                              -4,89,216.00 Direct Labor(249600*.41) $                               -   $             1,02,336.00 $                                              -1,02,336.00 Variable Overhead(249600*1.03) $                               -   $             2,57,088.00 $                                              -2,57,088.00 Total Variable Cost $                               -   $             8,48,640.00 $                                              -8,48,640.00 Net Income $                                                2,52,096.00 * Direct Material $                           1.96 Direct Labor $                           0.41 Variable Overhead $                           1.03 Aditional cost $                           1.01 Total $                           4.41 Yes Klin Fibre Company should accept the offer, because it would result increase net income of $252096 If Company would reject the offer,no revenue and expenses will be incurred.