Gary’s Company produces high quality shirts. Shirts must be well made because of

ID: 2481016 • Letter: G

Question

Gary’s Company produces high quality shirts. Shirts must be well made because of frequent washings. Currently, Gary sells 10,000 shirts at $60 each with the capacity to produce 11,000 shirts. Gary is considering a special order for 1,800 shirts at a price of $40. Currently, Gary has the following costs:

Unit Costs

$200,000

Facility Costs

$140,000

If Gary accepts the special order, they will incur an additional $2 per shirt in foreign currency transaction costs. No other product or facility costs will change.

Determine the impact of the special order on Gary’s operating income.

Unit Costs

$200,000

Facility Costs

$140,000

Explanation / Answer

Calculation of impact of the special order on Gary’s operating income:

Incremental Revenue (1800 Shirts * $40)

$ 72,000.00

Less: Incremental Units Costs (1800 Shirts * $200000 / 10000 Shirts)

$ (36,000.00)

Less: Incremental Facility Costs (1800 Shirts * $140000 / 10000 Shirts)

$ (25,200.00)

Less: Foreign currency transaction costs (1800 Shirts * $2)

$ (3,600.00)

Increase in Net income

$ 7,200.00

(Note : It is assumed that Facility costs are variable costs)