Western Jeans Co. has an annual plant capacity of 2,000,000 units, and current production is 1,920,000 units. Monthly fixed costs are $400,000, and variable costs are $9 per unit. The present selling price is $15 per unit. On July 6 of the current year, the company received an offer from Childs Company for 50,000 units of the product at $13 each. Childs 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 Western Jeans Co.
a. Prepare a differential analysis dated July 6 on whether to reject (Alternative 1) or accept (Alternative 2) the Childs order.
b. Briefly explain the reason why accepting this additional business will increase operating income.
c. What is the minimum price per unit that would produce a positive contribution margin?