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 $7 each and are normally sold for $14 each. Ms. Shelton has decided to order 790 shirts.
Required
a. 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?
b. 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

Answer:

a. $2,870, $1,330

b. $5,530, $70

Explanation:

The amount of profit earned is the difference between the total sales and the total cost. The total sales is the product of the selling price per shirt and the number of shirts sold while the total cost is the product of the number of shirts ordered and the cost per shirt.

Opportunity cost is the cost or worth of the alternative foregone.

Profit earned

= 600 * $14 - 790 * $7

= $2,870

Cost of waste due to excess inventory

= $7(790 - 600)

= $1,330

If the school receives actual sales orders for 800 shirts, the amount of profit the school will earn

= 790 ($14 - $7)

= $5,530 ( the number of units sold cannot be more than the number ordered).

The opportunity cost

= $7(800 - 790)

= $70