Question

Voyage Sail Makers manufactures sails for sailboats. The company has the capacity to produce 36,000 sails per year and is currently producing and selling 25,000 sails per year. The following information relates to current production:

Sales price per unit	$185​
Variable costs per unit:	​
Manufacturing	$60​
Selling and administrative	$20​
Total fixed costs:	​
Manufacturing	$700,000​
Selling and administrative	$300,000​

If a special pricing order is accepted for 5500 sails at a sales price of $160 per unit, and fixed costs remain unchanged, what is the change in operating income? (Assume the special pricing order will require variable manufacturing costs and variable selling and administrative costs.)

	A) Operating income decreases by $880,000.
	B) Operating income increases by $880,000.
	C) Operating income decreases by $440,000.
	D) Operating income increases by $440,000.

Answer 1

Correct answer--------------(D) Operating income increases by $440,000.

Working

financial advantage (disadvantage) of accepting the special order
Additional Revenue from offer (5500 x 160)	$ 880,000
Less: Total Additional cost due to acceptance of offer	$ 440,000
Financial Advantage	$ 440,000

.

Calculation of Additional Cost of Order
	Per Unit	Total
Variable manufacturing expense	$                    60.00	$ 330,000
Variable selling and administrative expenses	$                    20.00	$ 110,000
Total Additional cost due to acceptance of order	$                    80.00	$ 440,000