Briny Sail Makers manufactures sails for sailboats.The company has the capacity to produce 35,000 sails per year and is currently producing and selling 30,000 sails per year.The following information relates to current production: $$\begin{array} { | l | r | }
\hline \text { Sales price per unit } & \$ 185 \
\hline \text { Variable costs per unit: } & \
\hline \text { Manufacturing } & \$ 62 \
\hline \text { Selling and administrative } & \$ 20 \
\hline \text { Total fixed costs: } & \
\hline \text { Manufacturing } & \$ 675,000 \
\hline \text { Selling and administrative } & \$ 250,000 \
\hline
\end{array}$$ The fixed manufacturing costs increase by $102,000 for every 500 units produced beyond the maximum capacity of the plant.If a special pricing order is accepted for 5500 sails at a sales price of $165 per unit,and if the order requires no variable or fixed selling and administrative costs,what is the effect on operating income?

Question

Briny Sail Makers manufactures sails for sailboats.The company has the capacity to produce 35,000 sails per year and is currently producing and selling 30,000 sails per year.The following information relates to current production: $$\begin{array} { | l | r | } 
\hline \text { Sales price per unit } & \$ 185 \
\hline \text { Variable costs per unit: } & \
\hline \text { Manufacturing } & \$ 62 \
\hline \text { Selling and administrative } & \$ 20 \
\hline \text { Total fixed costs: } & \
\hline \text { Manufacturing } & \$ 675,000 \
\hline \text { Selling and administrative } & \$ 250,000 \
\hline
\end{array}$$ The fixed manufacturing costs increase by $102,000 for every 500 units produced beyond the maximum capacity of the plant.If a special pricing order is accepted for 5500 sails at a sales price of $165 per unit,and if the order requires no variable or fixed selling and administrative costs,what is the effect on operating income?

Quizplus · Accepted Answer

To calculate the effect on operating income, we first determine the additional costs and revenues from the special order. The special order is for 5,500 sails at $165 per unit.**Revenue from special order:**$$5,500 \text{ sails} \times \$165/\text{sail} = \$907,500$$**Variable costs for special order:**Manufacturing cost per unit = $62$$5,500 \text{ sails} \times \$62/\text{sail} = \$341,000$$**Fixed manufacturing costs increase:**Since the company is already producing 30,000 sails and has the capacity for 35,000 sails, the first 5,000 of the special order sails can be produced within the existing capacity. The additional 500 sails will incur extra fixed manufacturing costs. For every 500 units beyond capacity, fixed costs increase by $102,000. Therefore, for the 500 sails beyond capacity:$$1 \times \$102,000 = \$102,000$$**Total costs for special order:**$$Variable costs + Additional fixed costs = \$341,000 + \$102,000 = \$443,000$$**Effect on operating income:**$$Revenue - Total costs = \$907,500 - \$443,000 = \$464,500$$Therefore, accepting the special order increases operating income by $464,500.

Briny Sail Makers Manufactures Sails for Sailboats The Fixed Manufacturing Costs Increase by $102,000 for Every 500