Quality Products produces and sells screen-printed t-shirts to local organizatio

Question

Quality Products produces and sells screen-printed t-shirts to local organizations. The normal sales price per shirt is $12. Due to setup costs, they only accept orders of at least 100 shirts. The setup cost per order is $40 and the variable costs per shirt are $3. Fixed overhead costs per month total $2,000. Quality Products has the capacity to screen-print as many as 5,000 shirts per month, but is currently producing around 3,000. On May 1, the company was approached by a local non-prof group who wishes to place a single order for 100 shirts. The non-profit group has indicated that they can only pay $5 per shirt. A. List special order. B. What are the total relevant costs of accepting the special order? C. two qualitative factors that should be considered by Quality Products before accepting the From a quantitative basis, should they accept the special order? By what amount will Quality Product's net income increase or decrease if they accept the special order?

Explanation / Answer

Part-1) The qualitative factors that are required to be considered include

--whether customers who are paying full-price may get annoyed at the sales price the non-profit group receives?

--whether or not there exists an excess capacity for the acceptance of the special order?

Part-2) Solution: The total relevant cost of accepting the special order equals $340. The relevant cost per shirt equals $3.40

Working: $40 (set up cost) + $100*3 (variable cost) = $340; $340/100 shirts = $3.40

Part-3) Yes, the special order should be accepted because the special order price of $5.00 is exceeds the relevant costs of $3.40 per shirt; and as a result net income would increase by the amount of $160 [=100 * ($5.00 - $3.40)]

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