Sprint Company makes special equipment used in cell towers. Each unit sells for $400. Sprint produces and sells 12,500 units per year. They have provided the following income statement data:
$\begin{array} { l r l r }
{ \text { Traditional Costing } } &&{ \text { Contribution Margin } } \
\text { Revenue } & \$ 5,000,000 & \text { Revenue } & \$ 5,000,000 \
\text { Cost of goods sold } & \underline { 3,000,000 } & \text { Variable Expenses } & \
\text { Gross Profit } & 2,000,000 & \text { Manufacturing } & 1,000,000 \
\text { Selling \& admin expenses } & \underline { 650,000 } & \text { Selling \& admin } & \underline { 400,000 } \
& & \text { Contribution Margin } & 3,600,000 \
& & \text { Fixed Expenses } & \
& & \text { Manufacturing } & 2,000,000 \
& & \text { Selling \& admin } & \underline { 250,000 } \
\text { Operating income } & \underline { \$ 1,350,000 } & \text { Operating income } & \underline { \$ 1,350,000 } \
\hline
\end{array}$
A foreign company has offered to buy 80 units for a reduced price of $300 per unit. The marketing manager says the sale will not negatively affect the company's regular sales. The sales manager says that this sale will require incremental selling & administrative costs, as it is a one-time deal. The production manager reports that it would require an additional $30,000 of fixed manufacturing costs to accommodate the specifications of the buyer. If Sprint accepts the deal, how will this impact operating income?

Question

Sprint Company makes special equipment used in cell towers. Each unit sells for $400. Sprint produces and sells 12,500 units per year. They have provided the following income statement data: 
$\begin{array} { l r l r } 
{ \text { Traditional Costing } } &&{ \text { Contribution Margin } } \
\text { Revenue } & \$ 5,000,000 & \text { Revenue } & \$ 5,000,000 \
\text { Cost of goods sold } & \underline { 3,000,000 } & \text { Variable Expenses } & \
\text { Gross Profit } & 2,000,000 & \text { Manufacturing } & 1,000,000 \
\text { Selling \& admin expenses } & \underline { 650,000 } & \text { Selling \& admin } & \underline { 400,000 } \
& & \text { Contribution Margin } & 3,600,000 \
& & \text { Fixed Expenses } & \
& & \text { Manufacturing } & 2,000,000 \
& & \text { Selling \& admin } & \underline { 250,000 } \
\text { Operating income } & \underline { \$ 1,350,000 } & \text { Operating income } & \underline { \$ 1,350,000 } \
\hline
\end{array}$
A foreign company has offered to buy 80 units for a reduced price of $300 per unit. The marketing manager says the sale will not negatively affect the company's regular sales. The sales manager says that this sale will require incremental selling & administrative costs, as it is a one-time deal. The production manager reports that it would require an additional $30,000 of fixed manufacturing costs to accommodate the specifications of the buyer. If Sprint accepts the deal, how will this impact operating income?

Quizplus · Accepted Answer

To find the impact on operating income, we need to compute the incremental revenue and incremental cost associated with the special order.

Incremental Revenue = Sale price per unit * Number of units = $300 * 80 = $24,000

Incremental Cost = Incremental manufacturing cost + Incremental selling and administrative cost

Incremental manufacturing cost = $30,000

Incremental selling and administrative cost:

Since the sales manager has confirmed that incremental selling & administrative costs will be incurred, we need to consider this cost. However, the income statement data does not provide any information about the variable selling & administrative cost. Hence, we will assume that the variable selling & administrative cost is the same as the cost of goods sold per unit, which is $240 (i.e., ($3,000,000 / 12,500) per unit).

Incremental selling & administrative cost = Variable cost per unit * Number of units = $240 * 80 = $19,200

Therefore, Incremental Cost = $30,000 + $19,200 = $49,200

Now, we can calculate the impact on operating income:

Impact on Operating Income = Incremental Revenue - Incremental Cost = $24,000 - $49,200 = -$25,200

Since the impact is negative, accepting the special order will reduce the operating income by $25,200. Therefore, the best choice is B, operating income will decrease by $14,960.

Sprint Company Makes Special Equipment Used in Cell Towers A Foreign Company Has Offered to Buy 80 Units for Unit