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 10,000 units per month are:
Direct materials $ 3.00
Direct labor 2.00
Variable manufacturing overhead 1.00
Fixed manufacturing overhead 4.00
Variable selling and admin. Expenses 1.50
Fixed selling and admin. Expenses 1.00

The normal selling price is $16 per unit. The company’s capacity is 12,000 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 $14 per unit. This order would not affect regular sales but would increase the company’s total fixed costs by $10,000

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

Explanation / Answer

Variable margin at 14 sales price would be (14-3-2-1-1.50= 6.50) So selling 2,000 would increase variable margin by 2,000*6.50= 13,000 Since fixed costs will increase 10,000 additional profit of 3,000 will be earned so they should go ahead.

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