Question

Sky High Seats manufactures seats for airplanes. The company has the capacity to produce 100,000 seats...

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 $410​
​ ​
Variable costs per unit: ​
Manufacturing $250​
Marketing and administrative $80​
​ ​
Total fixed costs: ​
Manufacturing $770,000​
Marketing and administrative $250,000​

If a special sales order is accepted for 7200 seats at a price of $370 per unit, and fixed costs remain unchanged, how would operating income be affected? (NOTE: Assume regular sales are not affected by the special order.)

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Answer #1

Selling price of special order = $370

Variable cost

Manufacturing = $250

Marketing and administrative = $80

Total $330

Contribution margin = Selling price - Variable cost

= 370 - 330

= $40

Total contribution margin

= 7200*40

= $288,000

As the fixed cost will remain same therefore it will not be included in this. Also as the special order will not affect regular sales so not more opportunity cost to be added.

Therefore by accepting the special order the net operating income will increase by $288,000

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