Potlatch Company manufactures sonars for fishing boats. Model 100 sells for $200. Potlatch produces and sells 5,000 of them per year. Cost data are as follows: $\begin{array}{|l|r|r|}
\hline \text { Variable manufacturing } & \$ 105 &\text { per unit } \
\hline \text { Variable marketing } & \$ 5 &\text { per unit } \
\hline \text { Fixed manufacturing } & \$ 270,000& \text { per year } \
\hline \text { Fixed marketing \& admin } & \$ 140,000 &\text { per year }\
\hline
\end{array}$ An offer has come in for a one-time sale of 100 units at a special price of $120 per unit. The marketing manager says that the sale will not negatively affect the company's regular sales activities, and that it will not require any 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. What is the effect of this deal on operating income?

Question

Potlatch Company manufactures sonars for fishing boats. Model 100 sells for $200. Potlatch produces and sells 5,000 of them per year. Cost data are as follows: $\begin{array}{|l|r|r|}
\hline \text { Variable manufacturing } & \$ 105 &\text { per unit } \
\hline \text { Variable marketing } & \$ 5 &\text { per unit } \
\hline \text { Fixed manufacturing } & \$ 270,000& \text { per year } \
\hline \text { Fixed marketing \& admin } & \$ 140,000 &\text { per year }\
\hline 
\end{array}$ An offer has come in for a one-time sale of 100 units at a special price of $120 per unit. The marketing manager says that the sale will not negatively affect the company's regular sales activities, and that it will not require any 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. What is the effect of this deal on operating income?

Quizplus · Accepted Answer

The effect on operating income is calculated by considering only the relevant costs and revenues. The special price is $120 per unit, and the variable manufacturing cost is $105 per unit. The contribution margin per unit is $120 - $105 = $15. For 100 units, the increase in operating income is 100 units * $15 = $1,500.

Potlatch Company Manufactures Sonars for Fishing Boats An Offer Has Come in for a One-Time Sale of for $200