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,fixed costs remain unchanged,and there are no variable marketing and administrative costs for this order,what is the change in operating income?

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,fixed costs remain unchanged,and there are no variable marketing and administrative costs for this order,what is the change in operating income?

Quizplus · Accepted Answer

The contribution margin of each sail sold is $550 ($150 selling price – $100 variable production cost). The contribution margin ratio is 55% ($550 contribution margin divided by $1,000 selling price). Therefore, the additional operating income from selling 5,500 sails is $3,025,000 ($550 contribution margin per sail multiplied by 5,500 sails), which increases the original operating income of $10,000,000 to $13,025,000. Therefore, the change in operating income is an increase of $495,000 ($13,025,000 – $10,000,000).

Centric Sail Makers Manufactures Sails for Sailboats