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 in undergarments for sports activities. Operating at capacity, the company can produce 1,079,000 Y-Go undergarments a year. The per unit and the total costs for an individual garment when the company operates at full capacity are as follows.

		Per Undergarment			Total
Direct materials		$2.06			$2,222,740
Direct labor		0.43			463,970
Variable manufacturing overhead		1.04			1,122,160
Fixed manufacturing overhead		1.41			1,521,390
Variable selling expenses		0.37			399,230
Totals		$5.31			$5,729,490

The U.S. Army has approached Klean Fiber and expressed an interest in purchasing 249,600 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 $1.01 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).)

		Reject Order		Accept Order		Net Income Increase (Decrease)
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

acceptreject

the Armys offer.