Question

Becky Shelton, a teacher at Kemp Middle School, is in charge of ordering the T-shirts to be sold for the school’s annual fund-raising project. The T-shirts are printed with a special Kemp School logo. In some years, the supply of T-shirts has been insufficient to satisfy the number of sales orders. In other years, T-shirts have been left over. Excess T-shirts are normally donated to some charitable organization. T-shirts cost the school $5 each and are normally sold for $12 each. Ms. Shelton has decided to order 700 shirts.

Required

If the school receives actual sales orders for 600 shirts, what amount of profit will the school earn? What is the cost of waste due to excess inventory?

If the school receives actual sales orders for 800 shirts, what amount of profit will the school earn? What amount of opportunity cost will the school incur?

Answer 1

Solution 1:

Cost of shirt purchased = 700 * $5 = $3,500

Actual sales of shirts = 600 * $12 = $7,200

Amount of profit that scho0l earn = sales value - Cost = $7,200 - $3,500 = $3,700

Cost of waste due to excess inventory = (700-600) * $5 = $500

Solution 2:

Acutal sales order = 800

Actual sales units = Nos of units available i.e. 700 units

Sales value of shirts = 700 *$12 = $8,400

Amount of profit that school will earn = $8,400 - $3,500 = $4,900

Amount of opportunity cost that school incur = loss of profit on 100 units

= ($12 - $5) * 100 = $700