AAA Company makes T-shirts for men and sells them to book stores in colleges. Th
ID: 2375678 • Letter: A
Question
AAA Company makes T-shirts for men and sells them to book stores in colleges. The annual capacity is to make 120,000 shirts. Currently the company makes and sells 90,000 shirts at a selling price of $10.00. The variable production cost is $3.00 per unit and variable selling cost is $2.00 per unit. Total fixed cost = $150,000. Wens College has approached AAA Company with a special order for 25,000 shirts and is willing to pay $8 per shirt. The college wants its emblem to be imprinted on the shirts. AAA will have to buy a special machine for $12,000 to imprint this emblem.<?xml:namespace prefix = o ns = "urn:schemas-microsoft-com:office:office" />
a. Should the company accept this special order from Wens College? What will be the impact on the company%u2019s income if this order is accepted?
b. BONUS (10 POINTS)
Now assume the special order is for 40,000 shirts. Wens is willing to pay $8 per shirt and also needs the imprint of the emblem. However, there will be no variable selling cost paid for this special order. But the company has available capacity to produce only 30,000 units. If the special order is accepted, company has to fulfill the order for entire 40000 units.
Now decide if this special order be accepted? Why? Or why not?
Explanation / Answer
AAA Company makes T-shirts for men and sells them to book stores in colleges. The annual capacity is to make 120,000 shirts. Currently the company makes and sells 90,000 shirts at a selling price of $10.00. The variable production cost is $3.00 per unit and variable selling cost is $2.00 per unit. Total fixed cost = $150,000. Wens College has approached AAA Company with a special order for 25,000 shirts and is willing to pay $8 per shirt. The college wants its emblem to be imprinted on the shirts. AAA will have to buy a special machine for $12,000 to imprint this emblem.
a. Should the company accept this special order from Wens College? What will be the impact on the company income if this order is accepted?
Current status is :
Sale price pu = 10
VC pu (3+2) = 5
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COnt pu = 5
Total Cont = 90000*$5 = 450,000
Less Fixed cost 150,000
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Net Income $300,000 ...............(P)
SPl order :
Sale price pu = 8
Less Var cost(3+2) = 5
(No Selling cost as it is direct order)
------------------------
SO COnt pu = $3
SO Total Cont = 25000*$3 = $75,000
Less Addl Spl machine = $12000
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Net Addl Income $63,000 ...........(Q)
So COmpany should accept this spl order as it has Spare capacity of (120,000-90000=) 30,000 shirts. Also it is resultng in addl Net Incom e of $63,000
Total Income = P+Q 300,000+63,000 = 363,000 (R)
b. BONUS (10 POINTS)
Now assume the special order is for 40,000 shirts. Wens is willing to pay $8 per shirt and also needs the imprint of the emblem. However, there will be no variable selling cost paid for this special order. But the company has available capacity to produce only 30,000 units. If the special order is accepted, company has to fulfill the order for entire 40000 units.
Now decide if this special order be accepted? Why? Or why not?
To supply 40000 Shirts to Wens, AAA has to reduce sales of its existing shirts to 80,000 (ie by 10,000)as it has capacity of 120,000.
So Loss of Income from 10,000 Shits = 10000*$5 = $50,000
So Net Income from 80000 shirts = (P)-50,000
= 300,000-50,000 = $250,000 ................(M)
Now COnt pu from Spl order = 8-3= 5
So Total Cont = 40000*$5 = $200,000
Less Spl machine $12000
--------------------------
Net Income from Spl order = $188,000 .....(N)
SO New Total Income = M+N = 250,000+188,000 = $443,000 (R)
SO We see that with Spl order, still we are getting Higher Net Income.
So SPl order should be accepted.