Question

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 1,053,000 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 $1.96 $2,063,880
Direct labor 0.47 494,910
Variable manufacturing overhead 0.98 1,031,940
Fixed manufacturing overhead 1.41 1,484,730
Variable selling expenses 0.38 400,140
Totals $5.20 $5,475,600

The U.S. Army has approached Klean Fiber and expressed an interest in purchasing 249,700 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 Army’s offer, it will not incur any variable selling expenses related to this order.

Required:
Prepare an incremental analysis for the Klean Fiber.

Answer 1

Klean Fiber Company

Incremental Analysis for the

Special order by the U.S. Army:

Units to be purchased = 249,700

Sales Revenue $4.42

Variable costs:

Direct materials $1.96

Direct labor 0.47

Variable manufacturing overhead 0.98

Total variable costs 3.41

Additional for contribution margin 1.01

Contribution margin = $252,197 ($1.01 * 249,700)

Step-by-step explanation:

a) Data and Calculations:

Annual production capacity = 1,053,000

Per Undergarment Total

Direct materials $1.96 $2,063,880

Direct labor 0.47 494,910

Variable manufacturing overhead 0.98 1,031,940

Fixed manufacturing overhead 1.41 1,484,730

Variable selling expenses 0.38 400,140

Totals $5.20 $5,475,600