Avery Textile Company manufactures high-quality bed sheets and sells them in set

Question

Avery Textile Company manufactures high-quality bed sheets and sells them in sets to a well-known retail company for $80 a set. Avery has sufficient capacity to produce 150,000 sets of sheets annually; the retail company currently purchases 100,000 sets each year. Avery’s unit-level cost is $45 per set and its fixed cost is $1,050,000 per year. A motel chain has offered to purchase 15,000 sheet sets from Avery for $56.25 per set. If Avery accepts the order, the contract will prohibit the motel chain from reselling the bed sheets.

Required:

Should Avery accept or reject the special order? Support your answer with appropriate computations.

Explanation / Answer

Note: As the profit in case of accepting the motel chain contract is higher and as the capacity is not breached (150000 units), we would recommend to accept the order.

Profit if Avery does accept the order Proceeds from sales to retail company $ 80,00,000.00 Proceeds from sales to Motel Chain $   8,43,750.00 Less: Unit level cost for (100000+15000) units $ 51,75,000.00 Less: Fixed Cost $ 10,50,000.00 Profit $ 26,18,750.00 Profit if Avery does not accept the order Proceeds from sales to retail company $ 80,00,000.00 Less: Unit level cost for (100000) units $ 45,00,000.00 Less: Fixed Cost $ 10,50,000.00 Profit $ 24,50,000.00

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