Question

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 in undergarments for sports activities. Operating at capacity, the company can produce 1,060,000 Y-Go undergarments 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 $2.04 $2,162,400 Direct labor 0.53 561,800 Variable manufacturing overhead 0.99 1,049,400 Fixed manufacturing overhead 1.41 1,494,600 Variable selling expenses 0.31 328,600 Totals $5.28 $5,596,800 The U.S. Army has approached Klean Fiber and expressed an interest in purchasing 249,800 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 $0.99 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.

Answer 1

Answer and Explanation:

The preparation of incremental analysis for the Klean Fiber is shown below:-

                               Reject order         Accept order   Net Increase/

                                                                                      Decrease

Revenue

($4.55 × 249,800)                                $1,136,590      $1,136,590

Less:

Variable costs

Direct material                                     $509,592        $509,592

($2.04 × 249,800)    

Direct labor                                           $132,394           $132,394                

($0.53 × 249,800)

Variable overhead                              $247,302            $247,302

($0.99  × 249,800)

Total variable cost                            $889,288            $889,288

Net income                                         $247,302            $247,302

Therefore by accepting the order the net income increases by  $247,302 which means the net income is increasing by accepting the order.

Working note

Selling price = Direct material + Direct labor + Variable overhead + Additional amount

= $2.04 + $0.53 + $0.99 + $0.99

= $4.55