1.

Suppose

Nike

produces and sells 500,000 units of the LeBron James "Fearless Lion

Edition" basketball shirt. The selling price is $35, and there is excess capacity to pro-

duce an additional 300,000 shirts. The absorption cost of the shirts is $10,000,000

500,000, or $20 per shirt, consisting of variable manufacturing costs of $7,000,000

($7,000,000

,

500,000 or $14 per shirt) and fixed manufacturing costs of $3,000,000

($3,000,000

,

500,000 or $6 per shirt). Variable selling and administrative costs are

$3 per shirt, and fixed selling and administrative costs are $2,000,000. Assume Nike

receives an offer from

Sports Authority

to buy 100,000 shirts at a price of $18.00 per

shirt. If Nike accepts the order it would not incur any additional variable selling and

administrative costs, but it would have to pay a flat fee of $80,000 to the manufacturer's

agent who had obtained the potential order. Should Nike accept the special order?

2.

What if the order was for 250,000 units at a selling price of $13.00 and there was no

$80,000 agent's fee? One manager argued for acceptance of such an order as follows: