The manufacturing capacity of Jordan Company's facilities is 30,000 units a year.A summary of operating results for last year follows: $\begin{array}{lr}
\text { Sales (18,000 units @ } \$ 100) & \$ 1,800,000 \
\text { Variable Costs } & \$ 990,000 \
\text { Contribution Margin } & \$ 810,000 \
\text { Fixed Costs } & \$ 495,000 \
\text { Operating Income } & \$ 315,000
\end{array}$
A foreign distributor has offered to buy 15,000 units at $90 per unit next year.Jordan expects its regular sales next year to be 18,000 units.If Jordan accepts this offer and rejects some business from regular customers so as not to exceed capacity,what would be the total operating income next year? (Assume that the total fixed costs would be the same no matter how many units are produced and sold.)

Question

The manufacturing capacity of Jordan Company's facilities is 30,000 units a year.A summary of operating results for last year follows: $\begin{array}{lr}
\text { Sales (18,000 units @ } \$ 100) & \$ 1,800,000 \
\text { Variable Costs } & \$ 990,000 \
 \text { Contribution Margin } & \$ 810,000 \
\text { Fixed Costs } & \$ 495,000 \
\text { Operating Income } & \$ 315,000
\end{array}$ 
A foreign distributor has offered to buy 15,000 units at $90 per unit next year.Jordan expects its regular sales next year to be 18,000 units.If Jordan accepts this offer and rejects some business from regular customers so as not to exceed capacity,what would be the total operating income next year? (Assume that the total fixed costs would be the same no matter how many units are produced and sold.)

Quizplus · Accepted Answer

If Jordan accepts the offer to sell 15,000 units to the foreign distributor, the total sales next year would be:

18,000 regular units @ $100 = $1,800,000
15,000 units to the foreign distributor @ $90 = $1,350,000
Total Sales = $3,150,000

Total variable costs for producing 33,000 units would be:

(18,000 + 15,000) units @ $55 = $1,815,000

Contribution margin would be:

Total Sales - Total Variable Costs = $3,150,000 - $1,815,000 = $1,335,000

Total fixed costs would be the same as last year at $495,000.

Therefore, the total operating income would be:

Contribution Margin - Fixed Costs = $1,335,000 - $495,000 = $840,000.

Thus, the correct answer is (B) $705,000.

The Manufacturing Capacity of Jordan Company's Facilities Is 30,000 Units