E7.19 (LO 2) Hardy Fibre is the creator of Y-Go, a technology that weaves silver into fabrics to kill bacteria and odour on clothing while managing heat. Y-Go has become very popular in undergarments for sports activities. Operating at capacity, the company can produce one million Y-Go undergarments each year. The per-unit and total costs for the undergarment are as follows:

	Per Undergarment		Total
Direct materials	$2.00		$2,000,000
Direct labour	0.50		500,000
Variable manufacturing overhead	1.00		1,000,000
Fixed manufacturing overhead	1.25		1,250,000
Variable selling expenses	0.25		250,000
Total	$5.00		$5,000,000

The Canadian Armed Forces (CAF) has approached Hardy Fibre and expressed an interest in purchasing 200,000 Y-Go undergarments for soldiers stationed in extremely warm climates. The CAF would pay the unit cost for direct materials, direct labour, and variable manufacturing overhead costs. In addition, the CAF has agreed to pay an additional $1 per undergarment to cover all other costs and provide a profit. Presently, Hardy Fibre is operating at 70% capacity and does not have any other potential buyers for Y-Go. If Hardy Fibre accepts the CAFs offer, it will not incur any variable selling expenses for this order.

Instructions

1. Using incremental analysis, determine whether Hardy Fibre should accept the CAFs offer.
2. Assume Hardy Fibre can now sell one million undergarments in the open market at $8 per unit. Using incremental analysis, determine whether Hardy Fibre should accept the CAFs offer for the 200,000 garments.

Prepare incremental analysis for the make-or-buy decision.