Gardner Sail Makers manufactures sails for sailboats. The company has the capacity to produce 36,000 sails...
Gardner 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.
Sales price per unit $180
Variable costs per unit:
Manufacturing. $62
Selling & Admin. $22
Total fixed costs:
Manufacturing.
$700,000
Selling & Admin.
$250,000
Assume that a special pricing order is accepted for 5,600 sails at a sales price of $140 per unit. This special order requires both variable manufacturing and variable selling and administrative costs, as well as incremental fixed costs of $401,000. What will be the impact on operating income?
A. Operating income increases by $313,600
B. Operating income increases by $87,400
C. Operating income decreases by $313,600
D. Operaring income decreases by $87,400
Homework Answers
Computation of incremental profit (loss) from special order
|
Sales price |
140 |
|
Less: |
|
|
Manufacturing |
62 |
|
Selling and administration |
22 |
|
Contribution |
56 |
|
Units accepted |
5600 |
|
Contribution from special order |
313,600 |
|
Less: incremental fixed costs |
401,000 |
|
Decrease in operating income |
87,400 |
Note that the operating income is after all operating expenses that includes fixed costs.
Hence, the correct option is D. Operaring income decreases by $87,400
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Gardner Sail Makers manufactures sails for sailboats.
The company has the capacity to produce 36,000 sails...
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