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 3,000 seats at a price of $300 per unit, and fixed costs increase by $10,000, 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 3,000 seats at a price of $300 per unit, and fixed costs increase by $10,000, how would operating income be affected? (NOTE: Assume regular sales are not affected by the special order.)

Quizplus · Accepted Answer

First, let's calculate the contribution margin per unit:

Selling price per unit - Variable cost per unit = Contribution margin per unit

$1,200 - $800 = $400

The special sales order would bring in a total revenue of:

3,000 units x $300 = $900,000

The total variable cost for the special sales order would be:

3,000 units x $800 = $2,400,000

So the total contribution margin for the special sales order would be:

$900,000 - $2,400,000 = -$1,500,000

Since the contribution margin for the special sales order is negative, it would actually decrease operating income if accepted. Therefore, we should not accept the special sales order.

Thus, the operating income would remain the same at $20,000 (with fixed costs of $300,000 minus variable costs of $255,000).

However, if we had accepted the special order, the fixed costs would increase by $10,000, but the operating income would still increase by the contribution margin per unit multiplied by the number of units sold in regular production:

(75,000 units x $400) + (-3,000 units x $400) - $300,000 - $10,000 = $70,000

So the operating income would increase by $70,000 if the special sales order were accepted.

Sky High Seats Manufactures Seats for Airplanes