Decision on Accepting Additional Business

Madison Industries Inc. has an annual plant capacity of 800,000 units, and current production is 650,000 units. Monthly fixed costs are $1,200,000 and variable costs are $36 per unit. The present selling price is $50 per unit. The company received an offer from Story Mills Company for 125,000 units of the product at $41 each. Story Mills 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 Madison Industries Inc.

a. Prepare a differential analysis report for the proposed sale to Story Mills Company.

Madison Industries Inc.
Sell to Story Mills Company
Differential Analysis Report
Differential revenue from accepting the offer:
Revenue from sale of additional units	$
Differential cost of accepting the offer:
Variable costs from sale of additional units
Differential income from accepting the offer	$

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a. Follow Exhibit 11 in the text. Subtract the additional costs from the additional revenues.

b. Madison Inc. should: accept this additional business since the differential revenue is greater than the differential cost per unit.

c. What is the minimum price per unit that would produce a contribution margin? Round your answer to the nearest cent. $

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