Question

Sky High Seats manufactures seats for airplanes. The company has the capacity to produce 100,000 seats per year, but currently produces and sells 75,000 seats per year. The following information relates to current production of seats: Sale price per unit $420 Variable costs per unit: Manufacturing $260 Marketing and administrative $40 Total fixed costs: Manufacturing $770,000 Marketing and administrative $200,000 If a special sales order is accepted for 4000 seats at a price of $375 per unit, fixed costs remain unchanged, and no variable marketing and administrative costs will be incurred for this order, how would operating income be affected? (NOTE: Assume regular sales are not affected by the special order.)

Answer 1

Answer:

$460,000 increment in the operating income

Explanation:

Production = 75000

Unit sales price = $420

Sales revenue                                          31,500,000

Cost of sales

Manufacturing (260*75000)                    19,500,000

Gross profit                                               12,000,000

Marketing and admin (40*75000)           3,000,000

Manufacturing                                           770000

Marketing * Admin                                     200000

Operating income                                     8030000

Revenue for special order = 375*4000 = 1,500,000

Manufacturing cost =4000*260                 1,040,000

Gross profit                                                      460,000

There will be an increment of $460,000 in the operating income.