Lowwater Sailmakers manufactures sails for sailboats. The company has the capacity to produce 25,000 sails per year, and is currently producing and selling 20,000 sails per year. The following information relates to current production: If a special sales order is accepted for 5,000 sails at a price of $125 per unit, and fixed costs remain unchanged, what is the change in operating income? (Assume the special sales order will require variable manufacturing costs and variable marketing and administrative costs.)

Question

Lowwater Sailmakers manufactures sails for sailboats. The company has the capacity to produce 25,000 sails per year, and is currently producing and selling 20,000 sails per year. The following information relates to current production:  If a special sales order is accepted for 5,000 sails at a price of $125 per unit, and fixed costs remain unchanged, what is the change in operating income? (Assume the special sales order will require variable manufacturing costs and variable marketing and administrative costs.)

Quizplus · Accepted Answer

To find the change in operating income, we need to compare the current operating income to the operating income with the special sales order.

Current operating income:

Revenue from current production: 20,000 x $150 = $3,000,000 
Variable costs: 20,000 x $75 = $1,500,000 
Fixed costs: $1,200,000

Operating income = Revenue - Variable costs - Fixed costs = $3,000,000 - $1,500,000 - $1,200,000 = $300,000

Operating income with special sales order:

Revenue from current production: 20,000 x $150 = $3,000,000 
Revenue from special sales order: 5,000 x $125 = $625,000 
Total revenue: $3,625,000

Variable costs from current production: 20,000 x $75 = $1,500,000 
Variable costs from special sales order: 5,000 x $50 = $250,000 
Total variable costs: $1,750,000

Fixed costs: $1,200,000

Operating income = Revenue - Variable costs - Fixed costs 
Operating income = $3,625,000 - $1,750,000 - $1,200,000 = $675,000

Change in operating income = New operating income - Current operating income 
Change in operating income = $675,000 - $300,000 = $375,000

Therefore, the answer is D) Operating income increases $225,000.

Lowwater Sailmakers Manufactures Sails for Sailboats