Company A prints and distributes licensed T-shirts, which wholesale at $16 each. A major retail chain store has asked to be supplied with 3000 T-shirts at $14 each; these shirts would carry the store's brand name. To process the order, Company A would need to reconfigure the printing program to print the brand name. This would cost $4000 and would not be reusable. There would be no other additional costs. The current cost structure is: Should the special order be accepted, and why?
A) Yes, additional profit of $3 per shirt is made.
B) Yes, new equipment is purchased.
C) Yes, additional profit of $1.67 per shirt is made.
D) No, a loss of $4000 is incurred.

Question

Company A prints and distributes licensed T-shirts, which wholesale at $16 each. A major retail chain store has asked to be supplied with 3000 T-shirts at $14 each; these shirts would carry the store's brand name. To process the order, Company A would need to reconfigure the printing program to print the brand name. This would cost $4000 and would not be reusable. There would be no other additional costs. The current cost structure is:  Should the special order be accepted, and why?
A) Yes, additional profit of $3 per shirt is made. 
B) Yes, new equipment is purchased. 
C) Yes, additional profit of $1.67 per shirt is made. 
D) No, a loss of $4000 is incurred.

Quizplus · Accepted Answer

To determine if the special order should be accepted, we need to calculate the incremental profit by subtracting the incremental costs from the incremental revenue.

Incremental Revenue:

The major retail chain store is willing to buy 3000 T-shirts at $14 each, which is lower than the wholesale price of $16. The incremental revenue is:

$14 x 3000 = $42,000

Incremental Cost:

The cost to reconfigure the printing program to include the brand name is $4000. This cost is not reusable, meaning it cannot be spread over more than 3000 T-shirts. Hence, the incremental cost is:

$4000 / 3000 = $1.33

Incremental Profit:

The incremental profit is the difference between the incremental revenue and incremental cost:

$14 - $1.33 = $12.67

Therefore, for each T-shirt sold, Company A would make an additional profit of $12.67.

Thus, the special order should be accepted as it would generate additional profit of $1.67 per shirt.

Company a Prints and Distributes Licensed T-Shirts, Which Wholesale at $16