Assume Tony’s T-shirts makes shirts for local soccer, baseball, basketball, and other sports teams. The owner, Tony, purchases the shirts and prints graphics on the shirts for each team. The graphics were designed several years ago, so design costs are no longer incurred. On average, Tony sells 1,000 shirts each month. Typical monthly financial data follow:
|
|
Per unit (shs) |
Total monthly data
at 1,000 shirts (shs) |
|
Sales revenue |
|
20,000 |
|
20,000,000 |
|
Variable costs: |
|
|
|
|
|
Direct materials |
8,000 |
|
8,000,000 |
|
|
Direct labour |
2,000 |
|
2,000,000 |
|
|
Manufacturing overhead |
3,000 |
|
3,000,000 |
|
|
Total variable costs |
|
13,000 |
|
13,000,000 |
|
Contribution margin |
|
7,000 |
|
7,000,000 |
|
Fixed costs (rent, salaries, etc) |
|
|
|
4,000,000 |
|
Profit |
|
|
|
3,000,000 |
The monthly information provided relates to the company’s routine monthly operations. A representative of the local high school recently approached Tony to ask about a one-time special order. The high school will be hosting a statewide track and field event and is willing to pay Tony’s T-shirts shs 17,000 per shirt to make 200 custom T-shirts for the event. Because enough idle capacity exists to handle this order, it will not affect other sales. That is, Tony has the factory space and machinery available to produce more T-shirts.
Tony incurs the same variable costs of shs 13,000 per unit to produce the special order, and he will pay a firm shs 600,000 to design the graphics that will be printed on the shirts. This special order will have no other effect on Tony’s monthly fixed costs.
Required:
With relevant computations, discuss whether Tony should accept the special order (25 marks)
