Question

The following operating information reports the results of Riverbed Company’s production and sale of 12,500 air-conditioned motorcycle helmets last year. Based on early market forecasts, Riverbed expects the same results this year.

Sales		$1,942,000
Variable manufacturing expenses		960,000
Fixed manufacturing expenses		280,000
Variable selling and administrative expenses		118,000
Fixed selling and administrative expenses		224,000

The American Motorcycle Club has offered to purchase 2,000 helmets at a price of $100 each. Riverbed has sufficient idle capacity to fill the order, which would not affect the company’s cost structure or regular sales.

If Riverbed accepts this order, by how much will its income increase or decrease?

Operating income will ______ by $ _____ .

Answer 1

In this question, two point of views can be taken on "Variable Selling and Administrative expense"
CASE 1 : Variable selling and Administration expenses are also incurr additional (because Variable) on "American Motorcycle Club"
Solution : Current operating Income = 1942000 - 960000 - 280000 - 118000 - 224000 = $360000
Variable manufacturing expense per unit = $960000 / 12500
Variable manufacturing expense per unit = $76.8
VAriable Selling and Administrative expense = $118000 / 12500
VAriable Selling and Administrative expense = $9.44
Total Variable expense per unit = $76.8 + $9.44
Total Variable expense per unit = $86.24

Addition in operating income = 2000 ($100 - $86.24)

Increase in operating income = $27520

CASE 2 : Variable selling and Administration expenses are not incurr additional on "American Motorcycle Club"

Total variable cost per unit = $76.8
Addition in operating Income = 2000 ($100 - $76.8)

Increase in operating income = $46400.