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Ann [662]
2 years ago
13

Decision on Accepting Additional Business Homestead Jeans Co. has an annual plant capacity of 65,000 units, and current producti

on 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. If an amount is zero, enter "0". If required, use a minus sign to indicate a loss.
Business
1 answer:
Neko [114]2 years ago
5 0

Answer and Explanation:

The preparation of the differential analysis is presented below:

Particulars  Order rejected (Alternative 1) order accepted  (Alternative 2) Differential Effect on Income (Alternative 2)

Revenues         $0                                              $576,000     $576,000

                                                                       ($18,000 × $32)

Costs    

Variable Manufacturing Costs $0                   $522,000 -$522,000

                                                                       ($18,000 × $29)

Income (Loss)        $0                                            $54,000    $54,000

We simply deduct the variable manufacturing cost from the revenues so that the income or loss could come

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Answer:

The difference in value is worth $8,269 more in money.

Explanation:

Case 1. Payments are made at the end of each year

So here, we will use the annuity formula for computing the present value of payments that we are receiving at the end of each year.

Here

Annual Cash flow is $12,100

Interest Rate "r" is 7%

And

Number of Payments "n" will be 17

Present Value = Cash flow * [1 - 1 / (1+r)^n] / r

By putting values, we have:

Present Value = $12,100 * [1 - 1 / (1 + 7%)^17] / 7%

Present Value = $12,100 * 9.763223

Present Value = $118,135

Now

Cash 2. Payments are arising at the start of each year

Just like the case above, we will use the annuity formula for computing the present value of payments that we are receiving at the start of each year. The first payment will be at worth the same because it is received in today's price.

So

Present Value = Cash flow     +       Cash flow * [1 - 1 / (1+r)^n] / r

So by putting values, that were used in case 1, we have:

Present Value = $12,100 + $12,100 * (1 - (1/1.07)^16) / 0.07

Present Value = $12,100 + $12,100 * 9.446649

Present Value = $126,404

Difference in Present Value = PV of Case 1      -    PV of Case 2

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The difference in value is worth $8,269 more in money.

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All the options except A are expected response from the fall in price and helps in explaining why the aggregate demand curve shifted ( towards the right ) . In the option B , Tyler decided to remodel his kitchen because of fall in prices, as now he is able to spend more on consumption and investment activities. Same thing is happening in option C and D as the company's here are increasing their investment spending due to the decreased prices.

But the option A , isn't something that was expected as company's don't usually fire their workers just because they have fixed price wage contract and prices have fallen, company is trying to take advantage of fallen prices by  reducing the fixed wage workers and hiring new workers on a cheap wage , which help in reducing the company's cost.

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