David's Designs, a high-fashion women's dress manufacturer, is planning to market a new cocktail dress for the coming season. David's Designs supplies retailers in New York, Chicago, and California.

Four metres of material are laid out for the dress pattern. After cutting, some material remains, which can be sold as remnants. The company could also use the leftover material to manufacture a matching cape and handbag. However, if it uses the leftover material for the cape and handbag, more care will be needed in the cutting, and the cutting costs will therefore increase.

The company expects to sell 1,250 dresses if a matching cape and handbag are not available. David's Designs market research reveals, however, that dress sales would be 20% higher if a matching cape and handbag were available. The market research indicates that the cape and/or handbag could not be sold individually but only as accessories with the dress. The various combinations of dresses, capes, and handbags that retailers will sell are as follows:

Complete sets of dress, cape, and handbag

70%

Dress and cape

6%

Dress and handbag

15%

Dress only

9%

Total

100%

The material used in the dress costs $12.50 a metre, or $50.00 for each dress. The cost of cutting the dress if the cape and handbag are not manufactured is estimated at $20.00 a dress, and the resulting remnants can be sold for $5.00 for each dress cut out. If the cape and handbag are to be manufactured, the cutting costs will be increased by $9.00 per dress. There will be no saleable remnants if the capes and handbags are manufactured in the quantities estimated.

The selling prices and the costs to complete the three items once they are cut are as follows:

Selling Price per Unit

Unit Cost to Complete^*

Dress

$200.00

$80.00

Cape

27.50

19.50

Handbag

9.50

6.50

Instructions

a.Prepare David's Designs incremental analysis for manufacturing the capes and handbags with the dresses.

b.Based on your analysis, what decision should management make? Explain your reasoning.

c.Identify six qualitative factors that could influence the company's decision to manufacture the capes and handbags that match the dresses and explain your reasoning for each factor.