Exercise 20-4

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 as an undergarment for sports activities. Operating at capacity, the company can produce 1,018,100 undergarments of Y-Go a year. The per unit and the total costs for an individual garment when the company operates at full capacity are as follows.

Direct materials $2.00 $2,036,200

Direct labor 0.48 488,688

Variable manufacturing overhead 0.99 1,007,919

Fixed manufacturing overhead 1.55 1,578,055

Variable selling expenses 0.33 335,973

Totals $5.35 $5,446,835

The U.S. Army has approached Klean Fiber and expressed an interest in purchasing 250,800 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 $1.02 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 Armys offer, it will not incur any variable selling expenses related to this order.

Prepare an incremental analysis for the Klean Fiber. (Enter negative amounts using either a negative sign preceding the number e.g. -45 or parentheses e.g. (45).)

Revenues $ $ $

Variable costs:

Direct materials

Direct labor

Variable overhead

Total variable costs

Net income $ $ $

Should Klean Fiber accept the Army's offer?

Klean Fiber should --------- the Armys offer.