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 current production of seats: If a special sales order is accepted for 4000 seats at a price of $375 per unit, fixed costs remain unchanged, and no variable marketing and administrative costs will be incurred for this order, 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 current production of seats:  If a special sales order is accepted for 4000 seats at a price of $375 per unit, fixed costs remain unchanged, and no variable marketing and administrative costs will be incurred for this order, how would operating income be affected? (NOTE: Assume regular sales are not affected by the special order.)

Quizplus · Accepted Answer

The additional revenue from the special sales order would be 4000 seats × $375 per unit= $1,500,000. Since there are no variable marketing and administrative costs, operating income would increase by the entire amount of the additional revenue, which is $1,500,000. Therefore, operating income would increase from $1,920,000 to $2,380,000 ($1,920,000 + $1,500,000). This increase in operating income is reflected in answer choice B.

Sky High Seats Manufactures Seats for Airplanes