Sprint Company makes special equipment used in cell towers.Each unit sells for $400.Sprint uses just-in-time inventory procedures; it produces and sells 12,500 units per year.It has provided the following income statement data: A foreign company has offered to buy 100 units for a reduced price of $250 per unit.The marketing manager says the sale will not negatively impact the company's regular sales.The sales manager says that this sale will not require any incremental selling & administrative costs,as it is a one-time deal.The production manager reports that there is plenty of excess capacity to accommodate the deal without requiring any additional fixed costs.If Sprint accepts the deal,how will this impact operating income?

Question

Sprint Company makes special equipment used in cell towers.Each unit sells for $400.Sprint uses just-in-time inventory procedures; it produces and sells 12,500 units per year.It has provided the following income statement data:  A foreign company has offered to buy 100 units for a reduced price of $250 per unit.The marketing manager says the sale will not negatively impact the company's regular sales.The sales manager says that this sale will not require any incremental selling & administrative costs,as it is a one-time deal.The production manager reports that there is plenty of excess capacity to accommodate the deal without requiring any additional fixed costs.If Sprint accepts the deal,how will this impact operating income?

Quizplus · Accepted Answer

- Selling 100 units at a reduced price of $250 each will generate revenue of: 100 x $250 = $25,000
- The cost of producing and selling 100 units is: 100 x $100 = $10,000 (assuming the variable cost per unit remains the same)
- There are no incremental selling and administrative costs, so they will not affect operating income.
- There are no additional fixed costs because the production manager reports that there is plenty of excess capacity to accommodate the deal.
- Therefore, the operating income will increase by the difference between the revenue and the cost: $25,000 - $10,000 = $15,000.
- However, the income tax expense will also increase because of the additional income. Using the income statement data given, the income tax rate is: $1,000 / ($6,000 + $45,000) = 2%. Thus, the income tax expense will be: $15,000 x 2% = $300.
- Therefore, the net increase in operating income will be: $15,000 - $300 = $14,700, which is closest to answer choice A.

Sprint Company Makes Special Equipment Used in Cell Towers