Belltown Atheletic Supply (BAS) makes game jerseys for athletic teams. The F.C.
ID: 2364367 • Letter: B
Question
Belltown Atheletic Supply (BAS) makes game jerseys for athletic teams. The F.C. Kitsap soccer club has offered to buy 100 jerseys for the teams in its league for $15 per jersey. The team price for such jerseys normally $18, an 80% markup over BAS's purchase price of $10 per jersey. BAS adds a name and number to each jersey at a variable cost of $2 per jersey. The annual fixed cost of equipment used in the printing process is $6,000, and other fixed costs allocated to jerseys are $2,000. BAS makes about 2,000 jerseys per year, so the fixed cost is $4 per jersey. The equipment is used only for printing jerseys and stands idle 75% of the usable time. The manager of BAS turned down the offer, saying, "If we sell at $15 and our cost is $16, we lose money on each jersey we sell. We would like to help your league, but we can't afford to lose money on the sale." 1. Compute the amount by which the operating income of BAS would change if it accepted F.C. Kitsap's offer. 2. Suppose you were the manager of BAS. Would you accept the offer? In addition to considering the quantitative impact computed in the requirement 1, list two qualitative considerations that would influence your decision---one qualitative factor supporting acceptance of the offer and one supporting rejection.Explanation / Answer
F.C. Kitsap's offer were accepted.
Previous Operating Income
36,000 (2,000 x $18) Revenues
- 4,000 (2,000 x $2)VARIABLE COST
- 20,000 (2,000 x $10) TotaT PURCHASE COSTof jerseys
- 8,000 Fixed Costs
= $4,000
Operating Income if the offer is accepted
36,000 (2,000 x $18) Regular priced revenues
+ 1,500 (100 x $15) New jersey revenues
- 4,200 (2,100 x 2) Variable costs
- 21,000 (2,100 x $10) Total purchase price of jerseys
- 8,000 Fixed Costs
= $4,300
2. Suppose you were the manager of BAS. Would you accept the offer? In addition to considering the quantitative impact computed in requirement 1, list two qualitative consideration that would influence your decision, one qualitative factor supporting acceptance of the offer and one supporting rejection.
Operating income is increased by $300. The offer should be accepted.
Qualitative factor supporting acceptance.
By agreeing to this deal, word could spread around to other teams wishing to make the same deal, thereby increasing operating income.
Qualitative factor supporting rejection.
If the jerseys are all sold at $15 each, the break-even point (in units) is 2,667 (8,000 + 12x = 15x). So if the other customers that the company is currently making jerseys for insist on the same deal and no new customers come in, the company will lose money.
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