Polynesia Company manufactures sonars for fishing boats. Model 70 sells for $250. Polynesia produces and sells 5,500 of them per year. Cost data are as follows:
$$\begin{array} { | l | r | l | }
\hline \text { Variable manufacturing } & \$ 100 & \text { per unit } \
\hline \text { Variable marketing } & \$ 15 & \text { per unit } \
\hline \text { Fixed manufacturing } & \$ 280,000 & \text { per year } \
\hline \text { Fixed marketing \& admin } & \$ 150,000 & \text { per year } \
\hline
\end{array}$$ A potential deal has come up for a one-time sale of 30 units at a special price of $115 per unit. The marketing manager says that the sale will not negatively impact the company's regular sales activities, but it will require the normal amount of variable marketing costs. The production manager says that there is plenty of excess capacity and the deal will not impact fixed costs in any way. The controller points out, however, that because the incremental revenues are just equal to the incremental costs to fill the order, the deal will not have any impact on the bottom line. The controller is correct in his statement.

Question

Polynesia Company manufactures sonars for fishing boats. Model 70 sells for $250. Polynesia produces and sells 5,500 of them per year. Cost data are as follows:
 $$\begin{array} { | l | r | l | } 
\hline \text { Variable manufacturing } & \$ 100 & \text { per unit } \
\hline \text { Variable marketing } & \$ 15 & \text { per unit } \
\hline \text { Fixed manufacturing } & \$ 280,000 & \text { per year } \
\hline \text { Fixed marketing \& admin } & \$ 150,000 & \text { per year } \
\hline
\end{array}$$ A potential deal has come up for a one-time sale of 30 units at a special price of $115 per unit. The marketing manager says that the sale will not negatively impact the company's regular sales activities, but it will require the normal amount of variable marketing costs. The production manager says that there is plenty of excess capacity and the deal will not impact fixed costs in any way. The controller points out, however, that because the incremental revenues are just equal to the incremental costs to fill the order, the deal will not have any impact on the bottom line. The controller is correct in his statement.

Quizplus · Accepted Answer

The controller is incorrect in his statement. The incremental revenues from the special sale of 30 units are $3,450 (30 units x $115 per unit). The incremental variable costs are $1,500 (30 units x $100 variable manufacturing cost per unit + 30 units x $15 variable marketing cost per unit). Therefore, the incremental contribution margin is $1,950 ($3,450 - $1,500). This incremental contribution margin will increase the bottom line of the company, even though it does not impact fixed costs.

Polynesia Company Manufactures Sonars for Fishing Boats A Potential Deal Has Come Up for a One-Time Sale