Polynesia Company manufactures sonars for fishing boats. Model 70 sells for $300. Polynesia produces and sells 5,500 of them per year. Cost data are as follows: The sales manager says he has an opportunity to pitch a special sale to a new Canadian fishing company that is outfitting new boats. He proposes a sale of 40 units at a special price of $150 per unit. He says it will not cannibalize the company's regular sales and is a one-time transaction. It will require the normal amount of variable costs, both marketing and manufacturing, but will not impact fixed costs in any way. The president of the company has some reservations, but finally agrees to make the deal if and only if it adds a minimum of $1,500 to operating income. Based on the president's criteria, Polynesia will decline the offer.

Question

Polynesia Company manufactures sonars for fishing boats. Model 70 sells for $300. Polynesia produces and sells 5,500 of them per year. Cost data are as follows:  The sales manager says he has an opportunity to pitch a special sale to a new Canadian fishing company that is outfitting new boats. He proposes a sale of 40 units at a special price of $150 per unit. He says it will not cannibalize the company's regular sales and is a one-time transaction. It will require the normal amount of variable costs, both marketing and manufacturing, but will not impact fixed costs in any way. The president of the company has some reservations, but finally agrees to make the deal if and only if it adds a minimum of $1,500 to operating income. Based on the president's criteria, Polynesia will decline the offer.

Quizplus · Accepted Answer

The total revenue from the special sale would be 40 units x $150 per unit = $6,000. 
The variable cost per unit is not given, but we know that it is the same for both regular and special sales. Therefore, we can assume that the variable cost per unit is $100 (based on the regular selling price of $300 and assuming a 33% variable cost ratio). 
The total variable cost for the special sale would be 40 units x $100 per unit = $4,000. 
The contribution margin for the special sale would be $6,000 - $4,000 = $2,000. 
However, the special sale does not impact fixed costs in any way, so the total fixed costs and operating income would remain the same. 
Therefore, the special sale would not add the minimum of $1,500 to operating income required by the president and should be declined.

Polynesia Company Manufactures Sonars for Fishing Boats