Question

Comfort Cloud 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 6,500 seats at a price of $325 per unit, and fixed costs remain unchanged, how would operating income be affected? (NOTE: Assume regular sales are not affected by the special order.)

Answer 1

Operating income will increase by $357,500

Working

Calculation of Additional Cost of Order
	Per Unit	Total
Variable manufacturing cost	$                  220.00	$ 1,430,000
Variable Marketing and administrative	$                    50.00	$ 325,000
Total Additional cost due to acceptance of order	$                  270.00	$ 1,755,000

.

financial advantage (disadvantage) of accepting the special order
Additional Revenue from offer (6500 x $325)	$ 2,112,500
Less: Total Additional cost due to acceptance of offer	$ 1,755,000
Financial Advantage	$ 357,500