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Manhattan Fashions, Inc., a high-fashion dress manufacturer, is planning to market a new cocktail dress for the coming season. Manhattan Fashion supplies, retailers in the east and mid-Atlantic states.
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 cape and handbag. 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 are as follows:
| Percent of Total |
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 yard, 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 per dress. If the cape and handbag are manufactured, the cutting costs will be increased by $9.00 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 (excludes costs of material and cutting operation) |
Dress | $200.00 | $80.00 |
Cape | 27.50 | 19.50 |
Handbag | 9.50 | 6.50 |
Required:
1. Calculate Manhattan Fashions incremental profit or loss from manufacturing the cape and handbags in conjunction with the dresses.
2. Identify any qualitative factor that could influence the company’s management in its decision to manufacture capes and handbags to match the dresses.
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