Sky High Seats manufactures seats for airplanes. The company has the capacity to produce 100,000 seats per year, but currently produces and sells 75,000 seats per year. The following information relates to the current production of the product: If a special sales order is accepted for 7400 seats at a price of $350 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

Sky High Seats manufactures seats for airplanes. The company has the capacity to produce 100,000 seats per year, but currently produces and sells 75,000 seats per year. The following information relates to the current production of the product:  If a special sales order is accepted for 7400 seats at a price of $350 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 is $500 ($800 - $300). Therefore, the total contribution margin for the special sales order would be $3,700,000 ($500 x 7,400 seats). Since fixed costs remain unchanged, the operating income would increase by the amount of the contribution margin from the special order, which is $296,000 ($3,700,000 - [25,000 x $500]). Therefore, the correct answer is choice A, Increase by $296,000.

Sky High Seats Manufactures Seats for Airplanes