Potlatch Company manufactures sonars for fishing boats. Model 100 sells for $200. Potlatch produces and sells 5,000 of them per year. Cost data are as follows:
$$\begin{array} { | l | r | r |}
\hline \text { Variable manufarturing } & \$ 105.00 & \text { Per unit } \
\hline \text { Variable marketing } & \$ 5.00 & \text { Per unit } \
\hline \text { Fixed manufacturing } & \$ 270,000 & \text { Per year } \
\hline \text { Fixed marketing \& admin } & \$ 140,000 & \text { Per year } \
\hline
\end{array}$$
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A foreign company has offered to make a one-time purchase of 20 units at a price of $150 per unit. The marketing manager says that this sale will not affect Potlatch's normal sales activity, and it will not require any variable marketing costs. The production manager says that the company is working nearly at capacity and will have to take on additional fixed costs of $1,000 per year in order to accommodate the deal. If Potlatch accepts the sale, how will it affect operating income?

Question

Potlatch Company manufactures sonars for fishing boats. Model 100 sells for $200. Potlatch produces and sells 5,000 of them per year. Cost data are as follows:
$$\begin{array} { | l | r | r |} 
\hline \text { Variable manufarturing } & \$ 105.00 & \text { Per unit } \
\hline \text { Variable marketing } & \$ 5.00 & \text { Per unit } \
\hline \text { Fixed manufacturing } & \$ 270,000 & \text { Per year } \
\hline \text { Fixed marketing \& admin } & \$ 140,000 & \text { Per year } \
\hline
\end{array}$$
-
A foreign company has offered to make a one-time purchase of 20 units at a price of $150 per unit. The marketing manager says that this sale will not affect Potlatch's normal sales activity, and it will not require any variable marketing costs. The production manager says that the company is working nearly at capacity and will have to take on additional fixed costs of $1,000 per year in order to accommodate the deal. If Potlatch accepts the sale, how will it affect operating income?

Quizplus · Accepted Answer

The sale will increase operating income by $1,500. The variable costs of the sale are $105 + $5 = $110 per unit. The fixed costs are $1,000. The total cost of the sale is $110 * 20 + $1,000 = $2,300. The revenue from the sale is $150 * 20 = $3,000. The profit from the sale is $3,000 - $2,300 = $700. The increase in operating income is $700.

Potlatch Company Manufactures Sonars for Fishing Boats - a Foreign Company Has Offered to Make a One-Time

Potlatch Company Manufactures Sonars for Fishing Boats -
a Foreign Company Has Offered to Make a One-Time