The following information relates to current production of outdoor chaise lounges at Backyard Posh: The regular selling price per chaise lounge is $300. The company is analyzing the opportunity to accept a special sales order for 1100 chaise lounges at a price of $215 per unit. Fixed costs would remain unchanged. The company has the capacity to produce 135,000 chaise lounges per year, but is currently producing and selling 12,000 chaise lounges per year. Regular sales will not be affected by the special order. What is the impact on operating income if the company accepts the special order?
A)Increase by $236,500
B)Increase by $80,300
C)Decrease by $80,300
D)Decrease by $236,500

Question

The following information relates to current production of outdoor chaise lounges at Backyard Posh:  The regular selling price per chaise lounge is $300. The company is analyzing the opportunity to accept a special sales order for 1100 chaise lounges at a price of $215 per unit. Fixed costs would remain unchanged. The company has the capacity to produce 135,000 chaise lounges per year, but is currently producing and selling 12,000 chaise lounges per year. Regular sales will not be affected by the special order. What is the impact on operating income if the company accepts the special order?
A)Increase by $236,500 
B)Increase by $80,300 
C)Decrease by $80,300 
D)Decrease by $236,500

Quizplus · Accepted Answer

To determine the impact on operating income, we need to calculate the incremental revenue and incremental costs associated with the special sales order.

Incremental Revenue = Sales Price per Unit - Regular Selling Price per Unit
= $215 - $300
= -$85

This means that the company would lose $85 in revenue for each chaise lounge sold as part of the special order.

Incremental Cost = 0 (Fixed costs remain unchanged)

Therefore, the incremental operating income would be:

Incremental Operating Income = (Incremental Revenue x Number of Units) - Incremental Cost
= (-$85 x 1100) - $0
= -$93,500

This means that accepting the special sales order would decrease the company's operating income by $93,500. However, since the company is currently producing and selling only 12,000 chaise lounges per year out of its total capacity of 135,000 chaise lounges per year, it may be beneficial for the company to accept the special sales order as it would utilize some of its excess capacity and contribute towards covering its fixed costs.

The increase in contribution margin would be:

Contribution Margin = (Sales Price per Unit - Variable Cost per Unit)
= ($215 - variable cost per unit)

We do not have the variable costs per unit from the given information. Therefore, we cannot calculate the incremental contribution margin. However, if the incremental contribution margin ($ per unit) is more than the incremental decrease in operating income ($ per unit), it would be economically feasible to accept the special sales order.

The Following Information Relates to Current Production of Outdoor Chaise