Question

Freewave Company manufactures sonars for fishing boats. Model 100 sells for $200. Freewave produces and sells 5,000 of them per year. Cost data are as follows:

Variable manufacturing	$105.00	Per unit
Variable marketing	$5.00	Per unit
Fixed manufacturing	$270,000	Per year
Fixed marketing & admin	$140,000	Per year

A foreign company has offered to make a one-time purchase of 20 units at a price of $150 per unit. The marketing manager says that this sale will not affect Freewave's normal sales activity, and it will not require any variable marketing costs. The production manager says that the company is working nearly at capacity and will have to take on additional fixed costs of $1,000 per year in order to accommodate the deal. If Freewave accepts the sale, how will it affect operating income?

Answer 1

Net income will decrease by $100

Working

Calculation of Additional Cost of Order
	Per Unit	Total
Variable manufacturing cost	$                  105.00	$ 2,100
Additional fixed cost		$ 1,000
Total Additional cost due to acceptance of order	$                  105.00	$ 3,100

.

financial advantage (disadvantage) of accepting the special order
Additional Revenue from offer (20 x 150)	$ 3,000
Less: Total Additional cost due to acceptance of offer	$ 3,100
Financial Advantage	-$ 100