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down home jeans co. has an annual plant capacity of 66,100 units, and current production is 45,000 units. monthly fixed costs are $39,600, and variable costs are $25 per unit. the present selling price is $38 per unit. on november 12 of the current year, the company received an offer from fields company for 13,100 units of the product at $28 each. fields company will market the units in a foreign country under its own brand name. the additional business is not expected to affect the domestic selling price or quantity of sales of down home jeans co.

Sagot :

Based on the incremental analysis, Down Home Jeans Co. should accept Fileds company's offer to produce 13,100 units of the product for them.

Incremental analysis or differential analysis is a decision making technique used in business to determine the true cost difference between each alternative provided. Incremental analysis disregards any sunk cost or past cost on its calculation. Incremental analysis is one of importan tools for business strategy.

Based on the case, we know that:

Capacity = 66,100 units

Current production = 45,000 units

Fixed costs = $39,600 per month

Variable costs = $25 per unit

Selling price = $38 per unit

Fields' order = 13,100 units

Fields' price offer = $28 per unit

First of all, we have to figure out whether we have enough capacity to produce more products and meet Fields' order or not. We could use the idle production capacity to do so:

Idle production capacity = Production capacity - Current production

Idle production capacity = 66,100 - 45,000

Idle production capacity = 21,100 units

Idle production capacity should be greater than Fields' order for Down Home Jeans co. to be able to fulfill Fields' order without having openning new manufacturing facilities. Hence:

Idle production capacity ..... Fields' order

21,100 > 13,100

Down Home Jeans could fulfill Fields' order without any additional fixed costs.

Next, we will do the incremental analysis to decide whether accepting Fields' offer is profitable or not.

                              Reject Order     Accept Order       Differential Effect

                                (Alternative 1)  (Alternative 2)            On Income

                                                                                          (Alternative 2)

Revenues                  $1,710,000        $2,076,800             $366,800

Costs                         $39,600           $39,600                   $0

Variable

manufacturing costs $1,125,000       $1,452,500              $327,500

Income (Loss)            $545,400         $584,700                $39,300

Alternative 1 happens if Down Home Jeans decline Fields' offer and solely produce their own product then sell it like the original scenario.

Alternative 2 happens when Down Home Jeans accept Fields' offer and producing their own products at the same time and sell it in its original price to its own market. This scenario is possible to happen because Fields' market is a foreign country and compete in different market. Hence, Down Home's market will not be effected.

Based on the incremental analysis, Down Home Jeans should accept Fields offer to gain more profits and decrease COGS of the products.

Learn more about Incremental Analysis here: https://brainly.com/question/29559274

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