Centric Sail Makers manufactures sails for sailboats.The company has the capacity to produce 35,000 sails per year,and is currently producing and selling 25,000 sails per year.The following information relates to current production:
- If a special sales order is accepted for 5,500 sails at a price of $150 per unit,and fixed costs remain unchanged,what is the change in operating income? (Assume the special sales order will require variable manufacturing costs and variable marketing and administrative costs.)

Question

Centric Sail Makers manufactures sails for sailboats.The company has the capacity to produce 35,000 sails per year,and is currently producing and selling 25,000 sails per year.The following information relates to current production: 
- If a special sales order is accepted for 5,500 sails at a price of $150 per unit,and fixed costs remain unchanged,what is the change in operating income? (Assume the special sales order will require variable manufacturing costs and variable marketing and administrative costs.)

Quizplus · Accepted Answer

The contribution margin per sail will be:

Selling price per sail = $150 
Variable manufacturing cost per sail = $60 
Variable marketing and administrative cost per sail = $20

Contribution margin per sail = Selling price per sail - Variable manufacturing cost per sail - Variable marketing and administrative cost per sail 
= $150 - $60 - $20 
= $70

The total contribution margin for 5,500 sails = 5,500 x $70 = $385,000

Since fixed costs remain unchanged, the increase in contribution margin will result in an increase in operating income. Therefore, operating income will increase by $385,000.

Centric Sail Makers Manufactures Sails for Sailboats