Clear Sky Sailmakers manufactures sails for sailboats.The company has the capacity to produce 15,000 sails per year,but is currently producing and selling 10,000 sails per year.The following information relates to current production: $$\begin{array} { | l | c | }
\hline \text { Sale price per urit } & \$ 250 \
\hline & \
\hline \text { Variable costs per unit: } & \
\hline \text { Manufacturing } & \$ 165 \
\hline \text { Marketing and adrministrative } & \$ 50 \
\hline & \
\hline \text { Total Eixed costs: } & \
\hline \text { Manufacturing } & \$ 750,000 \
\hline \text { Marketing and adrinistrative } & \$ 200,000 \
\hline
\end{array}$$
- If a special sales order is accepted for 3,000 sails at a price of $215 per unit,fixed costs remain unchanged,and no variable marketing and administrative costs will be incurred for this order,how would operating income be affected? (NOTE: Assume regular sales are not affected by the special order.)

Question

Clear Sky Sailmakers manufactures sails for sailboats.The company has the capacity to produce 15,000 sails per year,but is currently producing and selling 10,000 sails per year.The following information relates to current production: $$\begin{array} { | l | c | } 
\hline \text { Sale price per urit } & \$ 250 \
\hline & \
\hline \text { Variable costs per unit: } & \
\hline \text { Manufacturing } & \$ 165 \
\hline \text { Marketing and adrministrative } & \$ 50 \
\hline & \
\hline \text { Total Eixed costs: } & \
\hline \text { Manufacturing } & \$ 750,000 \ 
\hline \text { Marketing and adrinistrative } & \$ 200,000 \
\hline
\end{array}$$
- If a special sales order is accepted for 3,000 sails at a price of $215 per unit,fixed costs remain unchanged,and no variable marketing and administrative costs will be incurred for this order,how would operating income be affected? (NOTE: Assume regular sales are not affected by the special order.)

Quizplus · Accepted Answer

Since regular sales are not affected by the special order, the increase in revenue from the special sales order would simply add to the company's total revenue.

Profit = (Price - Variable Cost) x Quantity - Fixed Costs

Since there are no variable marketing and administrative costs associated with the special sales order, the only additional variable cost incurred would be for materials and labor. Let's assume this cost is $150 per sail.

Profit from regular sales: 
(Price - Variable Cost) x Quantity - Fixed Costs 
= ($250 - $100) x 10,000 - $1,500,000 
= $1,000,000

Profit from special sales order: 
(Price - Variable Cost) x Quantity - Fixed Costs 
= ($215 - $150) x 3,000 - $1,500,000 
= $145,000

Total Profit: 
$1,000,000 + $145,000 = $1,145,000

Therefore, operating income would increase by $150,000 (Choice C).

Clear Sky Sailmakers Manufactures Sails for Sailboats - If a Special Sales Order Is Accepted for 3,000