At the end of October, Margaretlamented the company's situation: in the middle of production of Sheffield-T's most popular long-sleeve T-shirt, the company ran out of its usual collars, purchased from one main supplier. That supplier was also sold out. Sheffield-T could get a slightly different premade collar, from a new supplier, at the same cost. So, Margaret went ahead with the order, hoping it wouldn't delay production or affect the quality of the shirts.

As it turned out, the new collars failed Sheffield-T's quality control testing. Stuck with unwearable T-shirts, the company was also in a bind with its retail outlets, which wanted more shirts to sell! The costs to produce this most recent batch of shirts is as follows.

Direct material $ 68,000

Direct labor 34,000

Manufacturing overhead 19,000

Total costs $121,000

Volume in batch 20,000

(a)How much cost does Sheffield-T have tied up in each of these T-shirts? If it normally sells these shirts for $12 to the retailer, how much gross margin per unit does it generate on these sales?

Total cost $6.05/unit

Gross margin $5.95/unit

(b)Scrambling,Margarethas gone back to her original supplier of collars, which thankfully now has a large quantity it can ship to her. These collars cost $0.45 each, and the company can get enough of them to go back and fix the collars on the recently ruined batch, plus put some into the warehouse for a future batch. In order to fix the botched T-shirts, though,Sheffield-T will need to incur an extra $2 per shirt in labor costs to carefully remove the bad collars and re-attach the new ones. These reworked shirts should still be salable to retailers at the regular selling price.

How much gross margin per unit willSheffield-T generate if it fixes and sells these reworked shirts?

Gross margin $3.50/unit

Cost of Collar $0.45 Selling price $12.00

New DL cost $2.00 Less: cost/unit $8.50

Original cost $6.05 New GM/unit $3.50

New total cost/unit $8.50

(c) In the decision of whether or not to rework the bad batch of T-shirts, how much of the T-shirt cost was sunk?