Comfort Cloud 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 6,500 seats at a price of $325 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

Comfort Cloud 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 6,500 seats at a price of $325 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

The contribution margin per seat can be calculated using the current sales price and variable cost per unit:

Contribution margin per seat = Sales price per unit - Variable cost per unit
Contribution margin per seat = $500 - $300
Contribution margin per seat = $200

Therefore, the total contribution margin for the special order would be:

Contribution margin for special order = Contribution margin per unit × Units in special order
Contribution margin for special order = $200 × 6,500
Contribution margin for special order = $1,300,000

Since the fixed costs are unchanged, the total operating income would increase by the amount of the contribution margin for the special order:

Operating income increase = Contribution margin for special order
Operating income increase = $1,300,000

Therefore, the operating income would increase by $1,300,000, which is equivalent to a $357,500 increase in operating income for each 1,000 seats sold ($1,300,000 ÷ 6,500 ÷ 1,000 × 1,000). Thus, the correct answer is B.

Comfort Cloud Manufactures Seats for Airplanes