Saltwater Sail Makers manufactures sails for sailboats. The company has the capacity to produce 37,000 sails per year and is currently producing and selling 30,000 sails per year. The following information relates to current production: $$\begin{array} { | l | r | }
\hline \text { Sales price per unit } & \$ 180 \
\hline \text { Variable costs per unit: } & \
\hline \text { Manufacturing } &\$ 62\
\hline \text { Selling and administrative } & \$ 22 \
\hline \text { Total fixed costs: } &\
\hline \text { Manufacturing } & \$ 700,000 \
\hline \text { Selling and administrative } &\$ 300,000\
\hline
\end{array}$$ Assume that a special pricing order is accepted for 5600 sails at a sales price of $140 per unit. This special order requires both variable manufacturing and variable selling and administrative costs, as well as incremental fixed costs of $401,000. What will be the impact on operating income?

Question

Saltwater Sail Makers manufactures sails for sailboats. The company has the capacity to produce 37,000 sails per year and is currently producing and selling 30,000 sails per year. The following information relates to current production: $$\begin{array} { | l | r | } 
\hline \text { Sales price per unit } & \$ 180 \
\hline \text { Variable costs per unit: } &  \
\hline \text { Manufacturing } &\$ 62\
\hline \text { Selling and administrative } &  \$ 22 \
\hline \text { Total fixed costs: } &\
\hline \text { Manufacturing } & \$ 700,000   \
\hline \text { Selling and administrative } &\$ 300,000\
\hline
\end{array}$$ Assume that a special pricing order is accepted for 5600 sails at a sales price of $140 per unit. This special order requires both variable manufacturing and variable selling and administrative costs, as well as incremental fixed costs of $401,000. What will be the impact on operating income?

Quizplus · Accepted Answer

The contribution margin per sail is calculated as follows: 
Sales price per sail - Variable costs per sail 
= $140 - $112 - $18 - $10 
= $140 - $140 
= $0

Since the contribution margin is zero, there will be no impact on the operating income from the special pricing order. However, there will be incremental fixed costs of $401,000. Thus, the operating income will decrease by the amount of the incremental fixed costs, which is $401,000. 
Therefore, the operating income will decrease by $87,400 (=$401,000-$313,600).

Saltwater Sail Makers Manufactures Sails for Sailboats Assume That a Special Pricing Order Is Accepted for 5600