The Cardinal Co. produces t-shirts for promotion. The costs of producing and sel

Question

The Cardinal Co. produces t-shirts for promotion. The costs of producing and selling a single t-shirt at the company's current activity level of 12,000 units per month are:

Direct material $2.50
Direct labor 3.00
Variable manufacturing overhead 1.50
Fixed manufacturing overhead 3.50
Variable selling and admin. expenses 2.50
Fixed selling and admin. expenses 0.50

The normal selling price is $16 per unit. The company's capacity is 15,000 units per month. An order has been received from a retailer for 2,000 additional t-shirts at $13 per unit. The 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 to monthly profits?

a) N, would decrease monthly profits by $7,000
b) Yes, would increase monthly profits by $7,000
c) No, no impact to montly profits.
d) Yes, no impact to monly profits

Explanation / Answer

Profit per unit will be (13- 2.50- 3.00- 1.50-2.50) $3.50 per item. So 2,000* 3.50 is $7,000 added to profit (b).

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