6. (15 pts) Athletics Inc. makes jerseys for teams. The NJIT Soccer Coach offers

Question

6. (15 pts) Athletics Inc. makes jerseys for teams. The NJIT Soccer Coach offers to buy 100 jerseys with the school logo on them for $15 each. The usual price for jerseys is $18, which is an 80% markup over the $10 price Athletics pays to buy them. Athletics prints logos on the jerseys at a variable cost of $2 per jersey, and the fixed costs for equipment and other expenses is $8,000. Athletics makes about 2,000 jerseys per year, so the fixed cost is about $4 per jersey. Athletics has excess capacity to make the special order, but the manager turned down the NJIT offer saying, "If we sell at $15 and our cost is $16, we lose money on each jersey we sell" a) Compute the amount by which the operating income of Athleties will change if it accepted the NJIT offer. Is the manager right, and why? b)

Explanation / Answer

a) The amount by which the operating income will change would be -

Change in operating Income = Quantity x (Sales - Purchase price - Variable cost) = 100 x ($15 - $10 - $2) = $300

We will not consider fixed cost as it will remain the same irrespective of the quantity produced.

b) The manager is incorrect. The offer should be evaluated by considering only those costs that will be incurred directly due to acceptance of offer, i.e, fixed costs should not be considered while evaluating this offer because they will be the same irrespective whether the offer is accepted or not.

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