Sky High Seats manufactures seats for airplanes. The company has the capacity to produce 100,000 seats per year, but is currently producing and selling 75,000 seats per year. The following information relates to current production: If a special sales order is accepted for 7,000 seats at a price of $350 per unit, and fixed costs remain unchanged, how would operating income be affected? (NOTE: Assume regular sales are not affected by the special order.)

Question

Sky High Seats manufactures seats for airplanes. The company has the capacity to produce 100,000 seats per year, but is currently producing and selling 75,000 seats per year. The following information relates to current production:  If a special sales order is accepted for 7,000 seats at a price of $350 per unit, and fixed costs remain unchanged, how would operating income be affected? (NOTE: Assume regular sales are not affected by the special order.)

Quizplus · Accepted Answer

Since the company has the capacity to produce 100,000 seats and is currently producing 75,000 seats, it has a spare capacity of 25,000 seats. Therefore, the company can easily fulfill the special sales order of 7,000 seats without affecting the regular sales.

The total revenue from the special sales order would be: 
7,000 x $350 = $2,450,000

The total variable cost of producing 7,000 seats would be: 
7,000 x $200 = $1,400,000

The contribution margin would be: 
$2,450,000 - $1,400,000 = $1,050,000

Therefore, the increase in operating income would be: 
$1,050,000 - $490,000 (fixed costs) = $560,000

Thus, accepting the special sales order would increase operating income by $560,000.

Sky High Seats Manufactures Seats for Airplanes