The Cardinal Company produces T-shirts promoting Otterbein University to various

Question

The Cardinal Company produces T-shirts promoting Otterbein University to various retailers. The cost of producing and selling a single T-shirt at the company’s current activity level of 12,000 units per month are:
Direct materials $ 2.50
Direct labor 3.00
Variable manufacturing overhead 1.50
Fixed manufacturing overhead 3.50
Variable selling and admin. Expenses 2.50
Fixed selling and admin. Expenses 0.50

The normal selling price is $16 per unit. The company’s capacity is 15,000 units per month. Due to Otterbein University participating in the Division III National Championship game, an order has been received from a retailer for 2,000 additional T-shirts at $13 per unit. This order would not affect regular sales and would not change the company’s total fixed costs.

Ignore the impact of income taxes in your calculation.
Should the order be accepted? What would be the impact on monthly profits?

Explanation / Answer

(13-2.50-3.00-1.50-2.50= 3.50) Order should be accepted it will increase profits by 3.50*2,000= 7,000

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