AAA Company makes T-shirts for men and sells them to book stores in colleges. The annual capacity is to make 120,000 shirts. Currently the company makes and sells 90,000 shirts at a selling price of $10.00. The variable production cost is $3.00 per unit and variable selling cost is $2.00 per unit. Total fixed cost = $150,000. Wens College has approached AAA Company with a special order for 25,000 shirts and is willing to pay $8 per shirt. The college wants its emblem to be imprinted on the shirts. AAA will have to buy a special machine for $12,000 to imprint this emblem.
a.Should the company accept this special order from Wens College? What will be the impact on the company%u2019s income if this order is accepted?
Now assume the special order is for 40,000 shirts. Wens is willing to pay $8 per shirt and also needs the imprint of the emblem. However, there will be no variable selling cost paid for this special order. But the company has available capacity to produce only 30,000 units. If the special order is accepted, company has to fulfill the order for entire 40000 units.Now decide if this special order be accepted? Why? Or why not?