Camilla's, a high-fashion dress manufacturer, is planning to market a new cocktail dress for the coming year. Camilla's supplies retailers primarily in the eastern states.

Four metres of material are required to lay out the dress pattern. Some material remains after be sold. The leftover material could also be used to manufacture a matching handbag. However, if the leftover material is used for the wrap and handbag, more care will be required in the cutting operation, which will increase the cutting costs.

The company expects to sell 1250 dressess. Market research reveals that dress sales will be 20 percent higher if a matching wrap and handbag are available. The market research indicates that the wrap and handbag will be saleable only as accessories with the dress. The combination of dresses, wraps and handbags expected to be sold by retailers are as follows:

Percentage of total

Complete sets of dress, wrap and handbag........................70%

Dress and wrap..........................................................6%

Dress and handbag....................................................15%

Dress only...............................................................9%

Total...................................................................100%

The material used in the dresses costs $20 a metre, or $80 for each dress. The cost of cutting the dress if the wrap and handbag are not manufactured is estimated at $32 a dress, and the left-over material can be sold for $8 per dress. If the wrap and handbag are manufactured, the cutting costs will increase by $14.40 per dress and there will be no saleable remnants. The selling prices and the costs to complete the three items once they are cut are shown in the table below.

Required
1. Calculate Camlla's incremental profit or loss from manufacturing the wraps and handbags in conjunction with the dresses. Assume that Camilla's produces only sufficient product to meet sales demand.
2. Identify any other issues that could influence Camilla's management in their decision to manufacture wraps and handbags to match the dresses.

Transcribed Image Text:

Unit cost to complete (excludes costs of material and cutting operation) Selling price per unit Dress $320.00 $128.00 31.20 Wrap Handbag 44.00 15.20 10.40