Johnson produces 7,000 skateboards each month, which it sells for $60 each. Variable costs are $25 per unit, and fixed costs are $95,000 per month. A Canadian company has offered to buy an additional 1,000 skateboards for $30 per unit. Assuming that normal sales volume and fixed costs remain unchanged, filling this special order will cause Johnson's operating income to:
A) Decrease by $30,000.
B) Decrease by $6,250.
C) Decrease by $5,000.
D) Increase by $5,000.

Question

Quizplus · Accepted Answer

The contribution margin per unit is calculated by subtracting variable costs from sales price per unit.

Contribution margin per unit = Sales price per unit – Variable cost per unit
= $60 - $25
= $35

Contribution margin for 7,000 units = 7,000 × $35
= $245,000

Total revenue for 1,000 units = 1,000 × $30
= $30,000

Contribution margin for 1,000 units = 1,000 × ($30 - $25)
= $5,000

Since the fixed costs are the same, any increase in contribution margin will increase operating income. Therefore, filling the special order for 1,000 units will increase Johnson's operating income by $5,000.

Johnson Produces 7,000 Skateboards Each Month, Which It Sells for $60