Saltwater Sail Makers manufactures sails for sailboats.The company has the capacity to produce 37,000 sails per year and is currently producing and selling 30,000 sails per year.The following information relates to current production: $$\begin{array} { | l | r | }
\hline \text { Sales price per unit } & \$ 180 \
\hline \text { Variable costs per unit: } & \
\hline \text { Manufacturing } & \$ 62 \
\hline \text { Selling and administrative } & \$ 22 \
\hline \text { Total fixed costs: } & \
\hline \text { Manufacturing } & \$ 700,000 \
\hline \text { Selling and administrative } & \$ 300,000 \
\hline
\end{array}$$ Assume that a special pricing order is accepted for 5600 sails at a sales price of $140 per unit.This special order requires both variable manufacturing and variable selling and administrative costs,as well as incremental fixed costs of $401,000.What will be the impact on operating income?

Question

Saltwater Sail Makers manufactures sails for sailboats.The company has the capacity to produce 37,000 sails per year and is currently producing and selling 30,000 sails per year.The following information relates to current production: $$\begin{array} { | l | r | } 
\hline \text { Sales price per unit } & \$ 180 \
\hline \text { Variable costs per unit: } & \
\hline \text { Manufacturing } & \$ 62 \
\hline \text { Selling and administrative } & \$ 22 \
\hline \text { Total fixed costs: } & \
\hline \text { Manufacturing } & \$ 700,000 \
\hline \text { Selling and administrative } & \$ 300,000 \
\hline
\end{array}$$ Assume that a special pricing order is accepted for 5600 sails at a sales price of $140 per unit.This special order requires both variable manufacturing and variable selling and administrative costs,as well as incremental fixed costs of $401,000.What will be the impact on operating income?

Quizplus · Accepted Answer

The impact on operating income is calculated by considering the additional revenue from the special order minus the additional costs. Revenue from the special order is 5600 sails * $140 = $784,000. The variable costs for the special order are 5600 sails * ($62 + $22) = $470,400. The incremental fixed costs are $401,000. The total additional costs are $470,400 + $401,000 = $871,400. The impact on operating income is $784,000 - $871,400 = -$87,400, meaning a decrease in operating income by $87,400.

Saltwater Sail Makers Manufactures Sails for Sailboats Assume That a Special Pricing Order Is Accepted for 5600