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 2,500 seats at a price of $320 per unit, fixed costs increase by $5,000, and variable marketing and administrative costs for that order are $25 per unit, 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 2,500 seats at a price of $320 per unit, fixed costs increase by $5,000, and variable marketing and administrative costs for that order are $25 per unit, 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 for the special order:

Price per unit: $320 
Variable costs per unit: $25 
Contribution margin per unit: $320 - $25 = $295

Now, let's calculate the total contribution margin for the special order:

Contribution margin per unit: $295 
Units in the special order: 2,500 
Total contribution margin: $295 x 2,500 = $737,500

Next, let's calculate the total fixed costs for the special order:

Original fixed costs: $0 
Increase in fixed costs: $5,000 
Total fixed costs: $5,000

Finally, let's calculate the operating income for the special order:

Total revenue: 2,500 x $320 = $800,000 
Total variable costs: 2,500 x $25 = $62,500 
Total fixed costs: $5,000 
Operating income: $800,000 - $62,500 - $5,000 = $732,500

Therefore, operating income would increase by $182,500 ($732,500 - $550,000 regular operating income) if the special order is accepted.

Sky High Seats Manufactures Seats for Airplanes