Question

Gary’s Company produces high quality shirts. Shirts must be well made because of frequent washings. Currently,...

Gary’s Company produces high quality shirts. Shirts must be well made because of frequent washings. Currently, Gary sells 10,000 shirts at $60 each with the capacity to produce 11,000 shirts. Gary is considering a special order for 1,800 shirts at a price of $40. Currently, Gary has the following costs:

Unit Costs $200,000

Facility Costs $140,000

If Gary accepts the special order, they will incur an additional $2 per shirt in foreign currency transaction costs. No other product or facility costs will change. Determine the impact of the special order on Gary’s operating income.

Homework Answers

Answer #1

Calculation of impact of the special order on Gary’s operating income:

Incremental Revenue (1800 Shirts * $40)

$   72,000.00

Less: Incremental Units Costs (1800 Shirts * $200000 / 10000 Shirts)

$ (36,000.00)

Less: Incremental Facility Costs (1800 Shirts * $140000 / 10000 Shirts)

$ (25,200.00)

Less: Foreign currency transaction costs (1800 Shirts * $2)

$   (3,600.00)

Increase in Net income

$      7,200.00


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