A manufacturer of children's clothing,Kids Wear Pty Ltd,has been approached to supply a special order for 10 000 designer shirts at a price of $12 per shirt.The variable costs of producing a shirt are $8 per shirt.Kids Wear Pty Ltd has sufficient spare capacity to manufacture the order without affecting its normal production and the order is within the relevant range so there will be no impact on fixed costs.Should Kids Wear Pty Ltd accept the order?

Question

Quizplus · Accepted Answer

Since the order price of $12 per shirt is above the variable cost of production of $8 per shirt, there is a contribution margin of $4 per shirt ($12 - $8). Therefore, the total contribution margin for the entire order would be $40,000 ($4 x 10,000). Since the order falls within the relevant range and there is sufficient capacity to produce it without affecting normal operations, accepting the order would increase profits by $40,000. Therefore, the best option would be to accept the order.

A Manufacturer of Children's Clothing,Kids Wear Pty Ltd,has Been Approached