The Heritage Shirt Co. (HSC) is a manufacturer of high quality work shirts locat

Question

The Heritage Shirt Co. (HSC) is a manufacturer of high quality work shirts located in Queens, NY. Their standard output is 21,000 shirts per month and the usual price is $14. In the summer months demand for their shirts slows considerably and their output falls to 14,000 per month. They unexpectedly receive a special order for 6,000 shirts from a retailer whose market .s located far from HSC's usual customers, to be produced in July, but the offered price is only $9.95. The table below shows the firm's unit (or average) costs per shirt as calculated by the accounting department. The following facts are relevant: to avoid hiring and training costs in the fall (their busy season) HSC has a policy of keeping its skilled workers (but not its unskilled workers) on the payroll during the summer months even if there is not enough work for them. They engage in training and maintenance activities but are not required to do unskilled work. Your problem: advise HSC's management whether they should accept or reject the order. You should (of course!) use incremental analysis. Firm's Unit (or average) costs per shirt as calculated by accounting department

Explanation / Answer

Earnings if HSC accept order=6000*9.95

= $59700

Cost

Skilled labour+materials+miscellaneous+overhead=2.55+4.10+2.75+1.15

=$10.55 per shirt

total cost=10.55*6000 =$ 63300

HSC shoul reject order because cost> revenue by$3600

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