Klean Fiber Company is the creator of Y-Go, a technology that

| June 9, 2016

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 as an undergarment for sports activities. Operating at capacity, the company can produce 1,023,700 undergarments of Y-Go 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 $2.00 $2,047,400
Direct labor 0.52 532,324
Variable manufacturing overhead 1.07 1,095,359
Fixed manufacturing overhead 1.55 1,586,735
Variable selling expenses 0.34 348,058
Totals $5.48 $5,609,876

The U.S. Army has approached Klean Fiber and expressed an interest in purchasing 251,000 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 $1.02 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.

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