Golden Gate Fashions, Inc. a high-fashion dress manufacturer, is planning to market a new cocktail dress for the coming season. Golden Gate Fashions supplies retailers primarily on the west coast. Four yards of material are required to lay out the dress pattern. Some material remains after cutting, which can be sold as remnants. The leftover material also could be used to manufacture a matching handbag and an accessory cape to be worn about the shoulders. However, if the leftover material is to be used for the cape and handbag, more care will be required in the cutting operation, which will increase the cutting costs.

The company expects to sell 1,250 dresses. Market research reveals that dress sales will be 20 percent higher if a matching cape and handbag are available. The market research indicates that the cape and handbag will be salable only as accessories with the dress. The combination of dresses, capes, and handbags expected to be sold by retailers is as follows:

Percent of Total

Complete sets of dress, handbag, and accessory cape 70 %

Dress and accessory cape 6

Dress and handbag 15

Dress only 9

Total 100 %

The material used in the dress costs $20.00 a yard or $80.00 for each dress. The cost of cutting the dress if the accessory cape and handbag are not manufactured is estimated at $32.00 a dress, and the resulting remnants can be sold for $8.00 per dress. If the accessory cape and handbag are manufactured, the cutting costs will be increased by $14.40 per dress and there will be no salable remnants. 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 (exlcudes costs of material and cutting operation)

Dress $ 320.00 $ 128.00

Accessory cape 44.00 31.20

Handbag 15.20 10.40

Required:

1. Calculate Golden Gate Fashions incremental profit or loss from manufacturing the accessory capes and handbags in conjunction with the dresses.