Sprint Company makes special equipment used in cell towers. Each unit sells for $400. Sprint produces and sells 12,500 units per year. They have provided the following income statement data: A foreign company has offered to buy 80 units for a reduced price of $300 per unit. The marketing manager says the sale will not negatively affect the company's regular sales. The sales manager says that this sale will require 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 produces and sells 12,500 units per year. They have provided the following income statement data:  A foreign company has offered to buy 80 units for a reduced price of $300 per unit. The marketing manager says the sale will not negatively affect the company's regular sales. The sales manager says that this sale will require 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

A)
Offer = 80 × $300 = $24,000
Variable Manufacturing Cost per unit = $1,000,000 ÷ 12,500 = $80
Total Manufacturing Variable Cost = 80 × $80 = $6,400
Variable Selling and Administrative Expenses per unit = $400,000 ÷ 12,500 = $32
Total Variable Selling and Administrative Expenses = 80 × $32 = $2,560
Change in Operating Income = $24,000 - $6,400 - $2,560 = $15,040

Sprint Company Makes Special Equipment Used in Cell Towers