Sky High Seats manufactures seats for airplanes. The company has the capacity to produce 100,000 seats per year, but is 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 3000 seats at a price of $330 per unit, and fixed costs increase by $13,000, how would operating income be affected? (NOTE: Assume regular sales are not affected by the special order.)
A)Decrease by $77,000
B)Increase by $227,000
C)Increase by $90,000
D)Increase by $77,000

Question

Sky High Seats manufactures seats for airplanes. The company has the capacity to produce 100,000 seats per year, but is 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 3000 seats at a price of $330 per unit, and fixed costs increase by $13,000, how would operating income be affected? (NOTE: Assume regular sales are not affected by the special order.)
A)Decrease by $77,000 
B)Increase by $227,000 
C)Increase by $90,000 
D)Increase by $77,000

Quizplus · Accepted Answer

The incremental revenue from the special sales order is:
$330 x 3000 = $990,000
The incremental fixed costs from the special sales order are $13,000.
The incremental contribution margin from the special sales order is:
$990,000 - $13,000 - ($75,000/75,000*11ea8243_f283_b986_9591_7d9bb3fdd39e_TB3059_00) = $902,000
Thus, the incremental operating income from the special sales order is:
$902,000 - $0 = $902,000
Therefore, the operating income would increase by $77,000 ($902,000 - $825,000).

Sky High Seats Manufactures Seats for Airplanes