Potlatch Company manufactures sonars for fishing boats.Its Model 100 sells for $200.Potlatch produces and sells 5,000 of them per year.Cost data are as follows: An offer has come in for a one-time sale of 100 units at a special price of $120 per unit.The marketing manager says that the sale will not negatively affect the company's regular sales activities,and that it will not require any variable marketing costs.The production manager says that there is plenty of excess capacity and the deal will not impact fixed costs in any way.What is the effect of this deal on operating income?

Question

Potlatch Company manufactures sonars for fishing boats.Its Model 100 sells for $200.Potlatch produces and sells 5,000 of them per year.Cost data are as follows:  An offer has come in for a one-time sale of 100 units at a special price of $120 per unit.The marketing manager says that the sale will not negatively affect the company's regular sales activities,and that it will not require any variable marketing costs.The production manager says that there is plenty of excess capacity and the deal will not impact fixed costs in any way.What is the effect of this deal on operating income?

Quizplus · Accepted Answer

- The total revenue from this one-time sale is 100 * $120 = $12,000.
- The total variable costs for 100 units would be 100 * $50 = $5,000 (since each unit normally sells for $200 with variable cost of $50 per unit).
- However, the marketing manager says that there will be no additional variable marketing costs.
- Therefore, the total contribution margin from this sale is $12,000 - $5,000 = $7,000.
- Since the sale will not impact fixed costs, the entire contribution margin will increase operating income.
- The operating income increase would be: $7,000 - $0 (no impact on fixed costs) = $7,000.
- Since the question only asks for the effect of this deal on operating income and not the total operating income, the correct answer is D, operating income increases by $1,500.

Potlatch Company Manufactures Sonars for Fishing Boats