In: Accounting
i need the solution with step plz
Lowwater Sailmakers manufactures sails for sailboats. The company has the capacity to produce 25,000 sails per year, but is currently producing and selling 20,000 sails per year. The following information relates to current production:
Sale price per unit |
$150 |
Variable costs per unit: |
|
Manufacturing |
$55 |
Marketing and administrative |
$25 |
Total fixed costs: |
|
Manufacturing |
$640,000 |
Marketing and administrative |
$280,000 |
1. If a special sales order is accepted for 5,000 sails at a price of $125 per unit, and fixed costs remain unchanged, how would operating income be affected? (NOTE: Assume regular sales are not affected by the special order.)
A. Decrease by $5,000
B. Increase by $190,000
C. Decrease by $125,000
D. Increase by $225,000
2. If a special sales order is accepted for 2,000 sails at a price of $95 per unit, and fixed costs increase by $10,000, how would operating income be affected? (NOTE: Assume regular sales are not affected by the special order.)
A. Decrease by $34,000
B. Decrease by $44,000
C. Increase by $20,000
D. Increase by $25,000
3. If a special sales order is accepted for 2,500 sails at a price of $70 per unit, fixed costs increase by $10,000, and variable marketing and administrative costs for that order are $5 per unit lower than on regular sales, how would operating income be affected? (NOTE: Assume regular sales are not affected by the special order.)
A. Decrease by $22,500
B. Decrease by $82,500
C. Increase by $10,000
D. Increase by $22,500
4. If a special sales order is accepted for 3,000 sails at a price of $75 per unit, fixed costs remain unchanged, and no variable marketing and administrative costs will be incurred for this order, how would operating income be affected? (NOTE: Assume regular sales are not affected by the special order.)
A. Decrease by $5,000
B. Decrease by $15,000
C. Increase by $35,000
D. Increase by $60,000
Given Information,
(i) | Sale price per unit | $ 150 |
Variable costs per unit: | ||
(ii) | Manufacturing | $ 55 |
(iii) | Marketing and administrative | $ 25 |
(iv) | Total variable cost per unit (ii)+(iii) | $ 80 |
Answer to Question 1: Option D. Increase by $225,000
Increase ( Decrease ) in operating income = Increase in Income - Increase in Fixed expenses
= ( Increase in sales units * Contribution margin per unit ) - Increase in Fixed expenses
= ( 5,000 units * $ 45 ) - 0
= $ 225,000
Thus, Increase in operating income by $ 225,000 (Option D. Increase by $225,000)
Working note:
Contribution margin per unit = Selling price per unit - Variable cost per unit
= $ 125 - $ 80
= $ 45
Answer to Question 2: Option C. Increase by $20,000
Increase ( Decrease ) in operating income = Increase in Income - Increase in Fixed expenses
= ( Increase in sales units * Contribution margin per unit ) - Increase in Fixed expenses
= ( 2,000 units * $ 15 ) - $ 10,000
= $ 30,000 - $ 10,000
= $ 20,000
Thus, Increase in operating income by $ 20,000 (Option C. Increase by $20,000)
Working note:
Contribution margin per unit = Selling price per unit - Variable cost per unit
= $ 95 - $ 80
= $ 15
Answer to Question 3: Option A. Decrease by $22,500
Increase or Decrease in operating income = Decrease in Income + Increase in Fixed expenses
= ( Increase in sales units * Contribution loss per unit ) + Increase in Fixed expenses
= ( 2,500 units * $ 5 ) - $ 10,000
= $ 12,500 + $ 10,000
= $ 22,500
Thus, Decrease in operating income by $ 22,500 (Option A. Decrease by $22,500)
Working note:
1. Contribution margin per unit = Selling price per unit - Variable cost per unit
= $ 70 - $ 75
= $ 5
As variable cost per unit is higher than selling price thus contribution loss per unit is $ 5
2. Variable marketing and administrative costs for that order are $5 per unit lower than on regular sales
Variable cost per unit = Manufacturing + Marketing and administrative
= $ 55 + ( $ 25 - $ 5 )
= $ 75
Answer to Question 4: Option D. Increase by $60,000
Increase ( Decrease ) in operating income = Increase in Income - Increase in Fixed expenses
= ( Increase in sales units * Contribution margin per unit ) - Increase in Fixed expenses
= ( 3,000 units * $ 20 ) - 0
= $ 60,000
Thus, Increase in operating income by $ 60,000 (Option D. Increase by $60,000)
Working note:
1.Contribution margin per unit = Selling price per unit - Variable cost per unit
= $ 75 - $ 55
= $ 20
2. No variable marketing and administrative costs will be incurred for this order
Variable cost per unit = Manufacturing + Marketing and administrative
= $ 55 +$ 0
= $ 55