Company a Prints and Distributes Licensed T-Shirts, Which Wholesale at $16

question 43

Multiple Choice

Company A prints and distributes licensed T-shirts, which wholesale at $16 each. A major retail chain store has asked to be supplied with 3000 T-shirts at $14 each; these shirts would carry the store's brand name. To process the order, Company A would need to reconfigure the printing program to print the brand name. This would cost $4000 and would not be reusable. There would be no other additional costs. The current cost structure is: Should the special order be accepted, and why?

• A) Yes, additional profit of $3 per shirt is made.
• B) Yes, new equipment is purchased.
• C) Yes, additional profit of $1.67 per shirt is made.
• D) No, a loss of $4000 is incurred.

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Definitions:

Average Rate of Return

A metric used to evaluate the profitability of an investment, calculated by dividing the average annual profit by the initial investment cost.

Capital Investment Proposals

Suggestions or plans for spending on long-term assets intended to improve a company's profitability in the future.

Cash Payback Period

The duration required for an investment to generate cash flows sufficient to recoup the initial outlay.

Operating Income

Earnings before interest and taxes (EBIT), a measure of a company's profitability from its core operations.