Reference no: EM132659439

Jigo Fiber Company is the creator of J-Go, a technology that weaves silver into its fabrics to kill bacteria and odor on clothing while managing heat. J-Go has become very popular as undergarment for sport activities. Operating at capacity, the company can produce 1,000,000 undergarments of J-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	2,000,000
Direct labor	0.50	500,000
Variable manufacturing overhead	1.00	1,000,000
Fixed manufacturing overhead	1.50	1,500,000
Variable selling expenses	0.25	250,000
Totals	5.25	5,250,000.

The US Army has approached Jigo Fiber and expressed an interest in purchasing 200,000 JGo undergarment 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 P1 per undergarment to cover all other costs and provide a profit. Presently Jigo Fiber is operating at 70 percent capacity and does not have any other potential buyers of J-Go. If Jigo Fiber accepts the Army's offer, it will not incur any variable selling expenses related to this order.

Instructions

Question 1: Using incremental analysis, determine whether Jigo Fiber should accept the Army's offer.