Question

Piper Rose Boutique has been approached by the community college to make special polo shirts for the faculty and staff. The college is willing to buy 4,000 polos with its own design for $6.00 each. The company normally sells its shirts for $12.00 each. The company has enough excess capacity to make this order. A breakdown of the costs is as follows:

Direct materials $2.00
Direct labor 0.50
Variable factory overhead 1.50
Fixed factory overhead 2.50
Total cost per unit $6.50
Should Piper Rose Boutique accept the special order made by the college?

Answer 1

Piper Rose Boutique should analyze the financial implications of the special order to determine if it aligns with the company's goals and objectives.

Step-by-step explanation:

To determine whether Piper Rose Boutique should accept the special order made by the community college, we need to consider the financial implications. The college is willing to buy 4,000 polos at a price of $6.00 each, while the company normally sells its shirts for $12.00 each. The total cost per unit for Piper Rose Boutique is $6.50.

By accepting the special order, Piper Rose Boutique would sell the polos at a lower price than usual. However, if the company has enough excess capacity to fulfill the order, it can still generate a profit. The decision should be based on the potential profit from the order, taking into account the discounted price and the extra costs associated with production.

It is important for Piper Rose Boutique to analyze the financial implications of accepting the special order and determine if it aligns with the company's goals and objectives.

Answer 2

Piper Rose Boutique should accept the special order made by the college

Step-by-step explanation:

Price per unit the college is willing to pay = $6

Total variable cost per unit to be incurred by Piper Rose Boutique = Direct materials + Direct labor + Variable factory overhead = $2.00 + $0.50 + $1.50 = $4,00

Since the price per unit of $6 that the college is willing to pay is greater than the total variable cost per unit of $4 to be incurred by Piper Rose Boutique, Piper Rose Boutique should accept the special order made by the college.

Note: the Fixed factory overhead is not relevant in taking the decision. Only the variable costs are relevant.