Gary's Company produces high quality shirts. Shirts must be well made because of frequent washings. Currently, Gary sells 10,000 shirts at $60 each with the capacity to produce 11,000 shirts. Gary is considering a special order for 1,800 shirts at a price of $40. Currently, Gary has the following costs:Unit Costs $200,000Facility Costs $140,000If Gary accepts the special order, they will incur an additional $2 per shirt in foreign currency transaction costs. No other product or facility costs will change. Determine the impact of the special order on Gary's operating income.

Unless the capacity is expanded or some of the production gets outsource, the offer is not convenient.

Explanation:

Giving the following information:

Currently, Gary sells 10,000 shirts at $60 each with the capacity to produce 11,000 shirts. Gary is considering a special order for 1,800 shirts for $40.

Gary has the following costs:

Unit Costs $200,000

Facility Costs $140,000

If Gary accepts the special order, they will incur an additional $2 per shirt in foreign currency transaction costs.

Because it is a special offer and there is unused capacity, we will not have into account the fixed costs.

variable cost per unit = (200,000/10,000) + 2 = $22

Effect on income = (40 - 22) * 1,800 = $32,400

We have to take into account the loss of not selling 1,000 units.

Effect on income = 1,000*40 = $40,000

Total effect = 32,400 - 40,000 = $7,600

Unless the capacity is expanded or some of the production gets outsource, the offer is not convenient.