Question
Jennas Jeans produces 40,000 pairs of jeans each month for a total cost of $500,000. The costs are described below. Direct materials $200,000 Direct labor
Jennas Jeans produces 40,000 pairs of jeans each month for a total cost of $500,000. The costs are described below.
Direct materials | $200,000 |
Direct labor | 180,000 |
Manufacturing overhead | 120,000 |
Total | $500,000 |
Additional analysis reveals manufacturing overhead is 40% variable. Jenna normally sells these jeans to wholesalers for $20 each, however, a large retailer (Courteneys Cowboy Costumes) in a state far away is interested in possibly selling her jeans. Courteney is concerned about product demand for the jeans, so she doesnt want to pay the full $20. Instead, she offers Jenna $12,000 for 1,000 jeans. Jenna could fill the order without sacrificing other sales (she has excess capacity), but Courteney wants a special design that requires Jenna to purchase a special machine for $1,000. This machine has zero resale value after it is used.
Jenna wants to earn the additional business, but she is unwilling to take the offer if it loses her money. If Jenna accepts the offer, how much will her profits increase or decrease?
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