2. Quality Products produces and sells screen-printed t-shirts to local organiza

Question

2. 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 shits per month, but is currently producing around 3,000. On May 1, the company was approached by a local non-profit group who wishes to place a single order for 100 shirts. The non-profit group has indicated that they carn only pay $5 per shirt. A. List two qualitative factors that should be considered by Quality Products before accepting the special order B. What are the total relevant costs of accepting the special order? C. 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

Solution A:

Qualitative factors to be considered by Quality product before accepting the special order:

1. Quality product should consider credit worthiness of customer, what are the credit terms and ability to pay for customer.

2. Quality product should also consider the time and delivery terms. What is the date at which customer wants the product, whether quality products is able to deliver in time or not?

Solution B:

Relevant cost of accepting special order = Variable cost + Setup cost = 100*$3 + $40 = $340

Solution C:

Price offered by customer for special order = $5 per shirt

Total revenue from special order = $5 *100 = $500

Relevant cost = $340

Income from special order = $500 - $340 = $160

As net income increases by $160, therefore quality product should accept the special order.

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