Question

Company Gamma produces and sells plain t-shirts but is considering entering the market of coloured t-shirts. The plain t-shirts produced by Company Gamma costs $1 per unit and are sold for $5 per unit. If Company Gamma starts producing and selling coloured t-shirts, the cost is expected to be $1.20 per unit and sold for $6 per unit.

Required:

Show whether it is worth processing the plain t-shirts into coloured t-shirts.

Company Gamma has found a more efficient way of producing its plain t-shirts, reducing the production costs of plain t-shirts from $1 to $0.50 per unit. How does this increased efficiency affect the decision of whether processing the plain t-shirts into coloured t-shirts?

Answer 1

Answer (1)

Cost of making plain T-shirt = $1

Selling price of plain T-shirt =$5

                                Profit = Selling price - Cost price

                                        = $5 -$1

                                        = $4

Cost of making Coloured T-shirt = $1.20

Selling price of Coloured T-shirt =$6

                                       Profit = Selling price - Cost price

                                                = $6 - $1.20

                                                =$4.80

Conclusion: There is $ 0.80 per unit more profit earned by the company If starts producing and selling coloured t-shirts.

Answer (2)

Revised Cost of making plain T-shirt = $0.50

             Selling price of plain T-shirt =$5

                                Profit = Selling price - Cost price

                                        = $5 -$0.50

                                      = $4.50

Cost of making Coloured T-shirt = $1.20

Selling price of Coloured T-shirt =$6

                                       Profit = Selling price - Cost price

                                                = $6 - $1.20

                                                =$4.80

Conclusion: There is $ 0.30 per unit more profit earned by the company If starts producing and selling coloured t-shirts.