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 2,500 sails at a price of $205 per unit,fixed costs increase by $14,000,and variable marketing and administrative costs for that order are $25 per unit,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 2,500 sails at a price of $205 per unit,fixed costs increase by $14,000,and variable marketing and administrative costs for that order are $25 per unit,how would operating income be affected? (NOTE: Assume regular sales are not affected by the special order.)

Quizplus · Accepted Answer

The total revenue from the special sales order would be:

2,500 x $205 = $512,500

The total variable costs associated with the special order would be:

2,500 x $25 = $62,500

The contribution margin from the special order would be:

$512,500 - $62,500 = $450,000

The incremental fixed costs would be:

$14,000

Therefore, the incremental operating income from the special sales order would be:

$450,000 - $14,000 = $436,000

Since the regular sales are not affected, the company's total production and sales volume would increase to 12,500 sails per year (10,000 regular sales + 2,500 special sales).

Thus, the total operating income would increase by:

($436,000 / 12,500 sails) x 15,000 additional sails = $129,600

Therefore, the operating income would increase by $23,500 ($129,600 - $106,100).

Clear Sky Sailmakers Manufactures Sails for Sailboats - If a Special Sales Order Is Accepted for 2,500