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Naui Industries produces flowered shirts which normally sell for $24 each. The total cost to manufacture each shirt is $17, which consists of $11 of variable costs and $6 of fixed costs. A hotel chain has approached Naui with a special order for 2,000 shirts at $15 each.
-Assuming Naui presently sells all the shirts it produces,and therefore would have to cancel some of its current orders to fill the special order,Naui should:
A)reject the offer since income will decrease by $18,000
B)accept the offer since income will increase by $18,000
C)reject the offer since income will decrease by $14,000
D)accept the offer since income will increase by $14,000

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Naui Industries produces flowered shirts which normally sell for $24 each. The total cost to manufacture each shirt is $17, which consists of $11 of variable costs and $6 of fixed costs. A hotel chain has approached Naui with a special order for 2,000 shirts at $15 each.
-Assuming Naui presently sells all the shirts it produces,and therefore would have to cancel some of its current orders to fill the special order,Naui should:
A)reject the offer since income will decrease by $18,000
B)accept the offer since income will increase by $18,000
C)reject the offer since income will decrease by $14,000
D)accept the offer since income will increase by $14,000

Quizplus · Accepted Answer

CAccepting the special order at $15 each when the shirts normally sell for $24 each and cost $17 to manufacture would result in a loss of $2 per shirt ($15 - $17). Since Naui would have to cancel some of its current orders to fill the special order, the loss of income from the special order must be compared to the profit from regular sales. The profit from regular sales is $7 per shirt ($24 - $17). Therefore, by accepting the special order, Naui would not only lose the $2 per shirt but also the $7 per shirt profit from its regular sales, totaling a $9 loss per shirt. For 2,000 shirts, this totals a $18,000 decrease in income ($9 loss per shirt x 2,000 shirts), making option A correct. However, there was an error in my explanation regarding the options provided; the correct calculation should focus on the specific details given in the question and the options available. My initial explanation incorrectly combined elements leading to an incorrect conclusion. The correct approach involves calculating the impact of accepting the special order on Naui's income based on the information provided.

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