Question

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

Answer 1

Answer:

We should accept the order that is alternative 2.

Explanation:

Differential Analysis    

                Alternative 1          Alternative 2                       Differential Effect

Revenue                $0          $18000*$32=$576,000              $576,000

Variable Cost        $0          $18000*$29=-$522,000              $-522,000

Income                $0          $54,000                                      $54,000

Hence, As per Differential Analysis there is total gain of $54,000, we should accept the order.