Question

XYZ manufactures seats for helicopters. The company has the capacity to produce 100,000 seats per year, but is currently produces and sells 75,000 seats per year.

Selling price per unit	$ 200
Variable costs per unit:
Manufacturing	$ 110
Operating	$ 25
Fixed costs:
Manufacturing	$ 375,000
Operating	$ 100,000

If a special sales order is accepted for 2,500 seats at a price of $ 160 per unit, fixed costs increase by $ 2,500, and variable marketing and administrative costs for that order are $12.50 per unit, how would operating income be affected?

I got answer of  -($ 91,250) Please show the solution

Answer 1

1. If 75,000 seats are produced and sold;
	$	$
Selling price per unit		200
Less: Variable cost per unit;
Manufacturing	110
Operating	25
Total variable cost per unit		(135)
Contribution Margin per unit		65
Total Contribution Margin for 75,000 seats		4,875,000
Less: Fixed costs;
Manufacturing	375,000
Operating	100,000
Total fixed costs		(475,000)
Net income		4,400,000
2. If special order is accepted;
	$	$
Selling price per unit		160.00
Less: Variable cost per unit;
Manufacturing	110.00
Operating	25.00
Variable marketing and administrative costs	12.50
Total variable cost per unit		(147.50)
Contribution Margin per unit		12.50
Total Contribution Margin for 2,500 seats		31,250.00
Less: Additional fixed costs		(2,500.00)
Net income from special order		28,750.00
Conclusion: If special order is accepted, total net income of XYZ will increase by $ 28,750.