Centric Sail Makers manufactures sails for sailboats.The company has the capacity to produce 36,000 sails per year and is currently producing and selling 30,000 sails per year.The following information relates to current production: $$\begin{array} { | l | r | }
\hline \text { Sales price per unit } & \$ 185 \
\hline \text { Variable costs per unit: } & \
\hline \text { Manufacturing } & \$ 60 \
\hline \text { Selling and administrative } & \$ 20 \
\hline \text { Total fixed costs: } & \
\hline \text { Manufacturing } & \$ 675,000 \
\hline \text { Selling and administrative } & \$ 300,000 \
\hline
\end{array}$$ If a special pricing order is accepted for 5,600 sails at a sales price of $150 per unit,and fixed costs remain unchanged,what is the change in operating income? (Assume the special pricing order will require variable manufacturing costs and variable selling and administrative costs.)

Question

Centric Sail Makers manufactures sails for sailboats.The company has the capacity to produce 36,000 sails per year and is currently producing and selling 30,000 sails per year.The following information relates to current production: $$\begin{array} { | l | r | } 
\hline \text { Sales price per unit } & \$ 185 \
\hline \text { Variable costs per unit: } & \
\hline \text { Manufacturing } & \$ 60 \
\hline \text { Selling and administrative } & \$ 20 \
\hline \text { Total fixed costs: } & \
\hline \text { Manufacturing } & \$ 675,000 \
\hline \text { Selling and administrative } & \$ 300,000 \
\hline
\end{array}$$ If a special pricing order is accepted for 5,600 sails at a sales price of $150 per unit,and fixed costs remain unchanged,what is the change in operating income? (Assume the special pricing order will require variable manufacturing costs and variable selling and administrative costs.)

Quizplus · Accepted Answer

The change in operating income can be calculated by considering the additional revenue from the special order minus the additional variable costs. The additional revenue is 5,600 sails at $150 each, totaling $840,000. The additional variable costs include manufacturing costs of $60 per sail and selling and administrative costs of $20 per sail for the 5,600 sails, totaling $80 per sail or $448,000 in total. The change in operating income is the additional revenue ($840,000) minus the additional variable costs ($448,000), which equals $392,000 increase in operating income. Fixed costs do not change with the special order.

Centric Sail Makers Manufactures Sails for Sailboats If a Special Pricing Order Is Accepted for 5,600 Sails