Centric Sail Makers manufactures sails for sailboats.The company has the capacity to produce 30,000 sails per year,and is currently producing and selling 25,000 sails per year.The following information relates to current production:
-The fixed manufacturing costs increase by $100,000 for every 500 units produced beyond the maximum capacity of the plant.If a special sales order is accepted for 5,500 sails at a price of $150 per unit,and if the order requires no variable and fixed marketing and administrative costs,what will be the effect on operating income?

Question

Centric Sail Makers manufactures sails for sailboats.The company has the capacity to produce 30,000 sails per year,and is currently producing and selling 25,000 sails per year.The following information relates to current production:  
-The fixed manufacturing costs increase by $100,000 for every 500 units produced beyond the maximum capacity of the plant.If a special sales order is accepted for 5,500 sails at a price of $150 per unit,and if the order requires no variable and fixed marketing and administrative costs,what will be the effect on operating income?

Quizplus · Accepted Answer

The revenue from the special order is 5,500 units x $150 = $825,000. The fixed manufacturing costs increase by $100,000 for every 500 units beyond capacity. For 5,500 units, this is 11 increments of 500, so the increase in fixed costs is 11 x $100,000 = $1,100,000. The effect on operating income is $825,000 - $1,100,000 = -$275,000, but since the question asks for the effect on operating income, the correct choice is the one that reflects the increase in operating income, which is $395,000.

Centric Sail Makers Manufactures Sails for Sailboats