Pisces Company manufactures sonars for fishing boats.Model 100 sells for $400.Pisces produces and sells 5000 units per year.Cost data are as follows: $$\begin{array} { | l | l | l | }
\hline \text { Variable manufacturing } & \$ 100 & \text { per unit } \
\hline \text { Variable selling and administrative } & \$ 6 & \text { per unit } \
\hline \text { Fixed manufacturing } & \$ 270,000 & \text { per year } \
\hline \text { Fixed selling and administrative } & \$ 130,000 & \text { per year } \
\hline
\end{array}$$ An offer has come in for a one-time sale of 300 units at a special price of $120 per unit.The marketing manager says that the sale will not affect the company's regular sales activities,and that it will not require any variable selling and administrative costs.The production manager says that there is plenty of excess capacity and the sale will not impact fixed costs in any way.What is the effect of this deal on operating income?

Question

Pisces Company manufactures sonars for fishing boats.Model 100 sells for $400.Pisces produces and sells 5000 units per year.Cost data are as follows: $$\begin{array} { | l | l | l | } 
\hline \text { Variable manufacturing } & \$ 100 & \text { per unit } \
\hline \text { Variable selling and administrative } & \$ 6 & \text { per unit } \
\hline \text { Fixed manufacturing } & \$ 270,000 & \text { per year } \
\hline \text { Fixed selling and administrative } & \$ 130,000 & \text { per year } \
\hline
\end{array}$$ An offer has come in for a one-time sale of 300 units at a special price of $120 per unit.The marketing manager says that the sale will not affect the company's regular sales activities,and that it will not require any variable selling and administrative costs.The production manager says that there is plenty of excess capacity and the sale will not impact fixed costs in any way.What is the effect of this deal on operating income?

Quizplus · Accepted Answer

Regular annual revenue from selling 5000 units of Model 100 is:
5000 units x $400/unit = $2,000,000

Contribution margin per unit is sales price minus variable cost:
$400 - $270 = $130

Regular annual contribution margin is:
5000 units x $130/unit = $650,000

The one-time sale of 300 units at a special price of $120 per unit will generate revenue of:
300 units x $120/unit = $36,000

The total variable cost associated with producing these units will be:
300 units x $100/unit = $30,000

Contribution margin per unit from this sale is:
$120 - $100 = $20

The total contribution margin from this sale is:
300 units x $20/unit = $6,000

Since there are no additional fixed costs or variable selling and administrative costs associated with the one-time sale, the entire contribution margin will go towards increasing operating income.

Therefore, the effect of this deal on operating income is an increase of $6,000.

Pisces Company Manufactures Sonars for Fishing Boats An Offer Has Come in for a One-Time Sale of $400.Pisces