Question

A clothing manufacturer makes both shirts and shorts. The sales price for shirts is $24 with variable costs of $10 and shorts have a price of $32 and variable costs of $17. Which of the following is a true statement for this clothing manufacturer in the short term? 1. They would prefer to make shorts instead of shirts. 2. They would prefer to make skirts instead of shorts. 3. They would not have a preference for either product. 4. If both products used the same machine for different lengths of time, it would make no difference.

Answer 1

1)They would prefer to make shorts as contribution margin per unit is higher for shorts

Step-by-step explanation:

Step 1. Given information.

• Sales price shirts is $24

• Variable costs shirts is $10

• Sales price shorts $32

• Variable costs shorts $17

Step 2. Formulas needed to solve the exercise

Contribution margin = sales price - variable cost

Step 3. Calculation.

Contribution margin shirts = 24 - 10 = 14

Contribution margin shorts = 32 - 17 = 15

Step 4. Solution.

Contribution margin shorts > Contribution margin shirts