Stretch Inc. sells both yoga pants and yoga mats. Managers for Stretch are concerned about their operating losses. They are considering dropping their yoga mat product line. Operating income by prouct line and in total is shown below. 1) Prepare a new operating income analysis assuming Stretch will only sell yoga pants. 2) Then explain why Stretch should drop or not drop the yoga mat product line based on your analysis. All fixed costs are allocated fixed costs. Stretch Inc. Income Statement For year ended December 31, 2020 Total Yoga Pants Yoga Mats Sales Revenue 425,000 $ 299,000 $ 126,000 Variable Costs 221,000 136,000 35.000 Contribution Margin 204,000 63,000 41,000 Fixed Costs: Fixed Manufacturing 127,000 62,000 65,000 Selling & Administrative 64,000 46.000 18.000 Operating Income 13,000 55.000 (42.000) Stretch Inc. Income Statement For year ended December 31, 2020 Total Sales Revenue Variable Costs Contribution Margin Fixed Costs: Fixed Manufacturing Selling & Administrative Operating Income Explanation:Stretch Yoga pants sell for $92 a pair. Stretch Inc.'s costs for manufacturing a pair of yoga pants are presented below. Stretch Inc. receives an offer from Yoga-Iz-Us for a one-time order of 15,000 pair of yoga pants at $65 a pair. Stretch Inc. has enough normal capacity to accomodate the order. Yoga-Iz-Us is outside Stretch's normal market. No additional variable selling expense is expected. Direct Materials: $28 Direct Labor: 10 Variable Manufacturing Overhead: 9 Variable Selling Expense: 1 Fixed Manufacturing Overhead: 22 Total Cost per pair: $70 (a) Based on financial information only, would you accept this offer? Yes or No answer only. (b) Prepare a brief financial analysis to support your answer to question (a) would be a bad decision because the offer price of $65 is less than the cost to make a pair ($70). How would you respond to the marketing manager?Stretch Inc. manufactures the elastic band that becomes the waistline in a pair of yoga pants. The manufacturing costs for the elastic band alone are presented below. Stretch Inc. receives an offer from Namaste to supply the elastic band for $10 each. If Stretch purchases the elastic band from Namaste, the elastic band manufacturing facility will remain idle. 1) Prepare an analysis to determine whether Stretch should purchase the elastic band from Namaste. 2) Then explain any non-financial factors that might influence their decision. Direct Materials: $3 Direct Labor: 2 Variable Manufacturing Overhead: 3 Variable Selling Expense: co Fixed Manufacturing Overhead: Total Cost: $17 Analysis Make Buy Purchase Price: Direct Materials: Direct Labor: Variable Manufacturing Overhead: Variable Selling Expense: Fixed Manufacturing Overhead: Total Cost: Should the company make or buy the elastic band? Explain any non-financial factors that might influence the decision in this case
