II.

Strategic Analysis
* The relevant cost analysis developed for TTS provides useful information regarding the order’s
profitability.

* However, for a full decision analysis, TTS also should consider the strategic factors of capacity
utilization and short-term versus long-term pricing.

A. Is TTS now operating at full Capacity ?

* TTS currently has 50,000 units of excess capacity, more than enough for the ABG order.

* But what if TTS is operating at or near full capacity; would accepting the order cause the loss of
other possibly more profitable sales? If so, TTS should consider the Opportunity cost arising from
the lost sales.

* Assume that TTS is operating at 250,000 units and 250 batches of activity, and that accepting the
ABG order would cause the loss of sales of other T-shirts that have a higher contribution of $3.75
($9.00 _ $5.25).
* The opportunity cost is $3.75 per shirt and the proper decision analysis is as
follows :-

* The Following table shows the effect of accepting this special order on sales :-