Centric Sail Makers manufacture 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:
$$\begin{array} { | l | l | }
\hline \text { Sale price per unit } & \$ 180 \
\hline \text { Variable costs per unit: } & \
\hline \text { Manufacturing } & \$ 60 \
\hline \text { Marketing and administrative } & \$ 10 \
\hline \text { Total fixed costs: } & \
\hline \text { Manufacturing } & \$ 700,000 \
\hline \text { Marketing and administrative } & \$ 250,000 \
\hline
\end{array}$$
If a special sales order is accepted for 5600 sails at a price of $170 per unit,fixed costs remain unchanged and there are no variable marketing and administrative costs for this order,what is the change in operating profit?

Question

Centric Sail Makers manufacture 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:
$$\begin{array} { | l | l | } 
\hline \text { Sale price per unit } & \$ 180 \
\hline \text { Variable costs per unit: } & \
\hline \text { Manufacturing } & \$ 60 \
\hline \text { Marketing and administrative } & \$ 10 \
\hline \text { Total fixed costs: } & \
\hline \text { Manufacturing } & \$ 700,000 \
\hline \text { Marketing and administrative } & \$ 250,000 \
\hline
\end{array}$$
If a special sales order is accepted for 5600 sails at a price of $170 per unit,fixed costs remain unchanged and there are no variable marketing and administrative costs for this order,what is the change in operating profit?

Quizplus · Accepted Answer

First, we need to calculate the contribution margin per unit:

Contribution margin per unit = Selling price per unit – Variable cost per unit
Contribution margin per unit = $1,000 – ($800 + $50 + $20)
Contribution margin per unit = $130

Next, we need to calculate the current operating profit:

Operating profit = (Contribution margin per unit × Number of units sold) – Fixed costs
Operating profit = ($130 × 30,000) – $1,050,000
Operating profit = $2,250,000

Now, we can calculate the operating profit with the special sales order:

Operating profit = (Contribution margin per unit × Number of units sold) – Fixed costs + Special order profit
Operating profit = ($130 × 30,000) – $1,050,000 + ($170 × 5,600)
Operating profit = $2,866,000

Therefore, the change in operating profit is:
Change in operating profit = New operating profit – Current operating profit
Change in operating profit = $2,866,000 – $2,250,000
Change in operating profit = $616,000

Therefore, the answer is C) Operating profit increases by $616,000.

Centric Sail Makers Manufacture Sails for Sailboats If a Special Sales Order Is Accepted for 5600 Sails