The Following Monthly Financial Data Is for Tina's T-Shirt Company

question 22

Essay

The following monthly financial data is for Tina's T-Shirt Company.The company makes 25,000 T-shirts each month.
$\begin{array}{lrr}&& \text { Total monthly data at } \\&\text { Per unit } & 25,000 \text { units } \\\text { Sales revenue } & \$ 10.00 & \$ 250,000 \\\text { Variable costs } & \underline{5.50} & \underline{137,500} \\\text { Contribution margin } & \underline{\$ 4.50} & \$ 112,500 \\\text { Fixed costs } & & 98,000\\\text { Profit } & & \$ 14,500 \\\end{array}$
Tina is approached by a local youth camp that would like to have 2,000 T-shirts produced.The camp asked Tina to produce the shirts for $9.00 each rather than the standard price of $10.00.Tina can produce up to 28,000 shirts a month,so the special order will not affect regular customer sales.Variable costs per unit will remain at $5.50,but production of the shirts will require a special machine that costs $2,500.This special order will have no other effect on monthly fixed costs.
(1)Using differential analysis,determine whether Tina would be better off accepting or rejecting the special order.
(2)Assume Tina can only produce 25,000 T-shirts per month,and that regular customer sales would decrease as a result of the special order.Using differential analysis,determine whether Tina would be better off accepting or rejecting the special order.

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Definitions:

World Prices

The international market prices of goods and services, influenced by factors such as supply, demand, and trade policies.

Absolute Advantage

The ability of a country, individual, company, or region to produce a good or service at a lower cost per unit than any other production entity.

Comparative Advantage

The ability of an individual or group to carry out a particular economic activity more efficiently than another activity.

Production Relationships

Production relationships refer to the connections and interactions between inputs used in the production process and the resulting outputs.