Question

Sky High Seats manufactures seats for airplanes. The company has the capacity to produce 100,000 seats per year, but is currently produces and sells 75,000 seats per year. The following information relates to current production of seats:

Sale price per unit $400

Variable costs per unit:

Manufacturing $220

Marketing and administrative $50

Total fixed costs:

Manufacturing $750,000

Marketing and administrative $200,000

If a special sales order is accepted for 2,500 seats at a price of $320 per unit, fixed costs increase by $5,000, and variable marketing and administrative costs for that order are $25 per unit, how would operating income be affected? (NOTE: Assume regular sales are not affected by the special order.)

Answer 1

Income will increase by $182,500

Working

Calculation of Additional Cost of Order
	Per Unit	Total
Variable manufacturing cost	$                  220.00	$ 550,000
Variable marketing cost	$                    25.00	$ 62,500
Additional fixed cost		$ 5,000.00
Total Additional cost due to acceptance of order	$                  245.00	$ 617,500

.

financial advantage (disadvantage) of accepting the special order
Additional Revenue from offer (2500 x $320)	$ 800,000
Less: Total Additional cost due to acceptance of offer	$ 617,500
Financial Advantage	$ 182,500