Reference no: EM133168545

Question - East Valley Manufacturing manufactures active wear shirts. They have developed a unique running shirt that has become very popular. Operating at capacity, the company can produce 2,000,000 garments per year. The following cost information is from the most recent year:

Per unit Total

Direct materials $4.00

Direct labour 1.50

Variable manufacturing overhead 2.00

Fixed manufacturing overhead $3,000,000

Variable selling expenses .50

Fixed marketing and administration $4,000,000

East Valley currently sells to smaller retailers and sporting goods stores. The current selling price is $15.00, which allows stores to add a mark-up of 100% and sell the shirt at a retail price of $30.00. Sales volume is projected to be 1,500,000 shirts.

Required -

1. Determine the unit contribution and the projected operating income, based upon the above information.

2. A large retailer has approached East Valley and expressed an interest in purchasing 500,000 shirts. They want to retail the shirt for $24.00 and require a 100% mark-up on cost. The retailer also wants to put their company logo on the shirt which will add $0.10 to the cost of direct materials. East valley will be responsible for shipping costs which will be $0.05 per shirt. Because of the unique logo, East Valley feels that sales to other retailers will not be affected. Should East Valley accept the order?

3. Refer to the situation in part 2, except that Instead, East Valley is selling 1,800,000 shirts currently. What is the minimum selling price that Easy Valley would have to charge the large retailer, assuming that East Valley wants to increase operating income by $250,000 over the current amount?

4. Assume, instead, that the Canadian military believes the shirt would be beneficial for the armed forces and wishes to purchase 300,000 shirts. The military prefers "cost-plus" contracts. It will pay all of the variable manufacturing costs and a proportionate share of the fixed manufacturing costs. It will not pay for any of the variable selling or fixed marketing or administration costs. It will, however, pay $1.00 per shirt to cover these costs. Should East Valley accept the order, assuming its current sales volume is 1,500,000?

5. Assume, now, that the company is selling 1,800,000 shirts to its regular retailers. Should they accept the military order?