The Buckeye Company produces T-shirts promoting Ohio State University to various

Question

The Buckeye Company produces T-shirts promoting Ohio State 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 2.50
Variable manufacturing overhead 1.00
Fixed manufacturing overhead 4.00
Variable selling and admin. Expenses 2.00
Fixed selling and admin. Expenses 1.00

The normal selling price is $18 per unit. The company’s capacity is 12,000 units per month. Due to Ohio University participating in the BCS 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 and would not change the company’s total fixed costs.

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

Explanation / Answer

Yes, monthly profits will increase by 11,000 (45,000 without the order, 56,000 with the order) Without accepting extra order: Sales 180,000 (10,000*18) DM 30,000 (10,000*3) DL 25,000 (10,000*2.5) Variable OH 10,000 (10,000*1) Fixed OH 40,000 (10,000*4) Variable S&A 20,000 (10,000*2) Fixed S&A 10,000 (10,000*1) net income 45,000 (sales minus all the expenses) with accepting the order: Sales 208,000 (180,000 + 2000*14) DM 36,000 (12000*3) DL 30,000 (12000*2.5) variable OH 12,000 (12,000*1) Fixed OH 40,000 (no change) variable S&H 24,000 (12,000*2) fixed S&H 10,000 (no change) net income 56,000

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