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 the current production of the​ product:

Sale price per unit	$ 430$430
Variable costs per​ unit:
Manufacturing	$ 250$250
Marketing and administrative	$ 90$90
Total fixed​ costs:
Manufacturing	$ 800 comma 000$800,000
Marketing and administrative	$ 200 comma 000$200,000

If a special sales order is accepted for

7 comma 0007,000

seats at a price of

$ 360$360

per​ unit, and fixed costs remain​ unchanged, how would operating income be​ affected? (NOTE: Assume regular sales are not affected by the special​ order.)

A.

Increase by $ 2 comma 000 comma 000$2,000,000

B.

Increase by $ 2 comma 520 comma 000$2,520,000

C.

Decrease by $ 140 comma 000$140,000

D.

Increase by $ 140 comma 000$140,000

Answer 1

Answer is D. Increase by $ 140 comma 000$140,000

Explanation:

Variable cost per unit = Manufacturing cost per unit + Marketing and administrative cost

= $250 + $90 = $340

Total units in special sales order = 7000 units

Special order sales price = $360

Operating income per unit in special sales order = $360 - $340 = $20

Total operating income in special sales order = $20*7000 units = $140000

If fixed cost remain unchanged then total operating income would be increased by $140000.