Short-run pricing, capacity constraints. Fashion Fabrics makes pants from a special material. The fabric is special because of the way it fits many body types. The pants sell for $142. A well-known retail establishment has asked Fashion Fabrics to produce 3,000 shorts from the same fabric. The factory has unused capacity, so Barbara Brooks, the owner of Fashion Fabrics, calculates the cost of making a pair of shorts from the fabric. Costs for the pants and shorts are as follows: PantsShorts$ 72Fabric (6 yds. × $12; 3 yds. × $12)Variable direct manufacturing labor362010Variable manufacturing overheadFixed manufacturing cost allocatedTotal manufacturing cost8415$115$591. Suppose Fashion Fabrics can acquire all the fabric that it needs. What is the minimum price the com-pany should charge for the shorts?2. Now suppose that the fabric is in short supply. Every yard of fabric Fashion Fabrics uses to make shortswill reduce the pants that it can make and sell. What is the minimum price the company should chargefor the shorts?Required

Variable Cost:The Variable cost is that cost which varies with increase or decrease in the level of…

Answered: Pants Shorts $ 72 Fabric (6 yds. × $12;…

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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Short-run pricing, capacity constraints. Fashion Fabrics makes pants from a special material. The fabric is special because of the way it fits many body types. The pants sell for $142. A well-known retail establishment has asked Fashion Fabrics to produce 3,000 shorts from the same fabric. The factory has unused capacity, so Barbara Brooks, the owner of Fashion Fabrics, calculates the cost of making a pair of shorts from the fabric. Costs for the pants and shorts are as follows:

Pants
Shorts
$ 72
Fabric (6 yds. × $12; 3 yds. × $12)
Variable direct manufacturing labor
36
20
10
Variable manufacturing overhead
Fixed manufacturing cost allocated
Total manufacturing cost
8
4
15
$115
$59
1. Suppose Fashion Fabrics can acquire all the fabric that it needs. What is the minimum price the com-
pany should charge for the shorts?
2. Now suppose that the fabric is in short supply. Every yard of fabric Fashion Fabrics uses to make shorts
will reduce the pants that it can make and sell. What is the minimum price the company should charge
for the shorts?
Required

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