Centric Sail Makers manufactures sails for sailboats.The company has the capacity to produce 35,000 sails per year,and is currently producing and selling 25,000 sails per year.The following information relates to current production:
- If a special sales order is accepted for 5,500 sails at a price of $150 per unit,and if the order requires both variable manufacturing and variable marketing and administrative costs,and incremental fixed costs of $400,000,what will be the impact on operating income?

Question

Centric Sail Makers manufactures sails for sailboats.The company has the capacity to produce 35,000 sails per year,and is currently producing and selling 25,000 sails per year.The following information relates to current production: 
- If a special sales order is accepted for 5,500 sails at a price of $150 per unit,and if the order requires both variable manufacturing and variable marketing and administrative costs,and incremental fixed costs of $400,000,what will be the impact on operating income?

Quizplus · Accepted Answer

To calculate the impact on operating income, we need to calculate the incremental revenue and incremental costs associated with the special sales order.

Incremental revenue = 5,500 units × $150 per unit = $825,000
Variable manufacturing cost per unit = $300
Variable marketing and administrative cost per unit = $50

Incremental variable cost per unit = $300 + $50 = $350

Incremental total cost = 5,500 units × $350 per unit + $400,000 = $2,125,000
(Variable cost + Fixed cost)

Incremental operating income = Incremental revenue - Incremental total cost
= $825,000 - $2,125,000 = -$1,300,000

Therefore, operating income decreases by $15,000.

Centric Sail Makers Manufactures Sails for Sailboats