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Diamond Boot Factory normally sells its specialty boots for a pair. An offer to buy 90 boots for per pair was made by an organization hosting a national event in Norfolk. The variable cost per boot is , and special stitching will add
another per pair to the cost.
Determine the differential income or loss per pair of boots from selling to the organization.
Should Diamond Boot Factory accept or reject the special offer?

Ask by Nichols Turner. in the United States
Mar 25,2025

Solución de inteligencia artificial de Upstudy

Respuesta verificada por el tutor

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Selling the boots at $20 per pair results in a loss of $9 per pair compared to the normal sale price of $27. Therefore, Diamond Boot Factory should reject the special offer.

Solución

  1. The normal sale of a pair of boots brings in a selling price of
  2. The variable cost per boot is
    so for a pair the cost is
  3. Thus, the normal contribution or margin per pair is
  4. For the special offer, boots are sold at
  5. In this special order, there is an extra stitching cost of
    So the total cost for the special order per pair is the variable cost plus the stitching cost:
  6. The contribution margin per pair for the special order is:
  7. The differential income (or loss) per pair is the change in contribution margin when switching from the normal sale to the special order. That is,
    This means a loss of $9 per pair compared to the normal sale.
  8. Since the special offer results in a loss of $9 per pair, Diamond Boot Factory should reject the special offer.

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Extra Insights

To find the differential income or loss per pair of boots from the special offer, we need to calculate the revenue from the special offer and the total variable cost associated with each pair of boots.
  1. Revenue from the special offer:
  2. Total variable cost per pair:
  3. Now, we calculate the differential income/loss per pair:
So the differential income per pair is .
Now, since the differential income per pair is positive, Diamond Boot Factory should accept the special offer. It will benefit from selling the boots to the organization by earning an additional $9 for each pair sold. Sounds like a win-win!

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