Question

Sharman Athletic Gear Inc. (SAG) is considering a special order for 15,000 baseball caps with the logo of East Texas University (ETU) to be purchased by the ETU alumni association. The ETU alumni association is planning to use the caps as gifts and to sell some of the caps at alumni events in celebration of the university’s recent national championship by its baseball team. Sharman’s cost per hat is $3.50, which includes $1.50 fixed cost related to plant capacity and equipment. ETU has made a firm offer of $35,000 for the hats, and Sharman, considering the price to be far below production costs, decides to decline the offer.a Determine the total cost of the special order. Total cost of the special order b In terms of maximizing short-term operating profit, did Sharman make the wrong decision in declining the offer from ETU?

Answer 1

Solution and Explanation:

The data of SAG of special order is given below:

Cost per unit = $3.50 , Allocated fix cost = $1.50 , Number of units in order = 15000

Calculated the total cost of the special order as follows:

Incremental cost per unit = Cost per unit-Allocated fix cost  =$(3.50 minus 1.50)  =$2

Incremental cost per unit=cost per unit-allocated fix cost  =$(3.50 minus1.50) =$2

Total incremental cost 15000 unit = number of units in order x Incremental cost per unit  =15000 multiply $2  =$30000

Therefore, total cost of the special order is $30000

b) Offering price by ETU = $35000. Hence, the offer made by ETU would affect the short term of the special order.

Contribution cost = $(35000 minus 30000)  =$5000