Briny Sail Makers manufactures sails for sailboats.The company has the capacity to produce 35,000 sails per year and is currently producing and selling 30,000 sails per year.The following information relates to current production: $\begin{array}{|r|r|}
\hline \text { Sales price per unit } & \$ 175 \
\hline \text { Variable costs per unit: } & \
\hline \text { Manufacturing } &\$ 62 \
\hline \text { Selling and administrative } & \$ 22 \
\hline \text { Total fixed costs: } & \
\hline \text { Manufacturing } &\$ 675,000 \
\hline \text { Selling and administrative } & \$ 300,000\
\hline
\end{array}$ The fixed manufacturing costs increase by $102,000 for every 500 units produced beyond the maximum capacity of the plant.If a special pricing order is accepted for 5500 sails at a sales price of $160 per unit,and if the order requires no variable or fixed selling and administrative costs,what is the effect on operating income?

Question

Briny Sail Makers manufactures sails for sailboats.The company has the capacity to produce 35,000 sails per year and is currently producing and selling 30,000 sails per year.The following information relates to current production: $\begin{array}{|r|r|}
\hline \text { Sales price per unit } & \$ 175 \
\hline \text { Variable costs per unit: } & \
\hline \text { Manufacturing } &\$ 62  \
\hline \text { Selling and administrative } & \$ 22 \
\hline \text { Total fixed costs: } &  \
\hline \text { Manufacturing } &\$ 675,000 \
\hline \text { Selling and administrative } & \$ 300,000\
\hline
\end{array}$ The fixed manufacturing costs increase by $102,000 for every 500 units produced beyond the maximum capacity of the plant.If a special pricing order is accepted for 5500 sails at a sales price of $160 per unit,and if the order requires no variable or fixed selling and administrative costs,what is the effect on operating income?

Quizplus · Accepted Answer

The special order will increase operating income by $437,000. The special order will contribute $880,000 in revenue (5,500 units x $160 per unit). The variable manufacturing costs for the special order will be $341,000 (5,500 units x $62 per unit). The fixed manufacturing costs will increase by $102,000, since the special order will require the production of 500 units beyond the maximum capacity of the plant. Therefore, the total cost of the special order will be $443,000 ($341,000 + $102,000). The operating income from the special order will be $437,000 ($880,000 - $443,000).

Briny Sail Makers Manufactures Sails for Sailboats The Fixed Manufacturing Costs Increase by $102,000 for Every 500