Two alums of the UW Foster School of Business founded Emerald City Wear (ECW), a clothing manufacturer located in Seattle. Their strategy is to produce lightweight, warm, water-resistant garments suited to the Pacific Northwest's mild and damp climate. One of their garments is a reversible zip-front vest. While ECW can make up to 10,000 of these in a month with its current facilities, its normal production and sales activity level has regularly been 8,000 vests a month. Last November, the alums received an inquiry from the UW Foster School of Business for 1,000 vests of various sizes with the Foster School logo (shown above) embroidered on the front, to be distributed to faculty and donors. This was expected to be a one-time order and ECW would need to manufacture the vests in December to be ready by December 18 for distribution at the School's holiday event. According to ECW's accounting system, the cost of producing and selling a single regular vest (without the special logo) at current activity level was as follows: Direct materials (e.g., fabric and zippers) $6.50 Direct labor (e.g., cutters and stitchers) 5.00 Variable overhead 2.50 Fixed overhead*(e.g., depreciation of building and equipment, property taxes, insurance, managers' salarles, utilities) 4.00 Variable selling expenses (e.g., sales commissions and freight costs) 1.50 Fixed selling and administrative expenses (e.g. showroom and office costs) ** 2.00 Total cost per vest $21650 determined at normal capacity and allocated according to direct labor hours ** allocated based on 'ability to bear? The normal selling price for a regular vest is $30. ECW would outsource the stitching of the logo on these Foster School vests for a flat fee of $1,000. This order is not expected to affect regular sales. ECW is hoping to be able to sell the vests to UW for $18. 1. If the order is accepted, by how much will ECW's December profits change? That is, will profits go up or down as a result of the order and by how much? 2. 3. Now assume that ECW is currently making 10.000 vests in December. If they supply the vests to the Foster School at $18 per vest, what will be the effect on their December profit? Where, in the accounting reports, will the effects of (2) appear? All the data for regular vests remains unchanged. Assume that the company now has 500 of them left over from last year. However, they are chartreuse (a bright yellow-green) and have not sold at regular prices. If these vests must be sold through regular channels but at reduced prices, what cost is relevant for establishing the minimum selling price for these vests? 4
