Reference no: EM132338419

Question

Pharoah 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 1,083,000 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 $2.05 $2,220,150

Direct labor 0.46 498,180

Variable manufacturing overhead 1.03 1,115,490

Fixed manufacturing overhead 1.48 1,602,840

Variable selling expenses 0.33 357,390

Totals $5.35 $5,794,050

The U.S. Army has approached Pharoah Fiber and expressed an interest in purchasing 249,500 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 $1.09 per undergarment to cover all other costs and provide a profit. Presently, Pharoah Fiber is operating at 70% capacity and does not have any other potential buyers for Y-Go. If Pharoah Fiber accepts the Army's offer, it will not incur any variable selling expenses related to this order.

Prepare an incremental analysis for the Pharoah 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