Question

Sky High Seats manufactures seats for airplanes. The company has the capacity to produce 100,000 seats per year, but currently produces and sells 75,000 seats per year. The following information relates to the current production of the product:

Regular selling price per unit	$400
Variable costs per unit:
Manufacturing	$220
Marketing and administrative	$50
Total fixed costs:
Manufacturing	$1,500,000
Marketing and administrative	$1,000,000

If a special sales order is accepted for 7,000 seats at a price of $350 per unit, and fixed costs remain unchanged, how would operating income be affected? (NOTE: Assume regular sales are not affected by the special order.)

Increase by $800,000

Increase by $245,000

Decrease by $350,000

Increase by $560,000

Decrease by $157,500

Answer 1

Based on the information available, we can calculate the Operating Income with respect to the Special sales order as follows:-

Step 1:- Calculate Contribution margin per unit:-

Additional Operating income = Contribution margin per unit * 7,000 seats

	Particulars	Per Unit
	Sales Revenue	350
	Variable Costs
	Manufacturing	220
	Marketing and administrative	50
	Total Costs	270
	Contribution margin	80

Please note that Fixed costs are irrelevant in special order sales as they continue to be incurred irrespective of accepting/rejecting the special order sales.

Step 2:- Calculate the increase in Net Operating Income

Additional Operating income = Contribution margin per unit * 7,000 seats

=$80 * 7,000

Additional Operating Income =$ 560,000

Based on the above calculation, the correct answer is Option D - $560,000

Option A is incorrect. The $800,000 is an incorrect based on the above calculation.

Option B is incorrect. The $245,000 is incorrect based on the above calculation.

Ooption C is incorrect. The has been an actual increase of net income by $560,000 . This option is incorrect as this option mentions that there has been a decrease in net income.

Option D is correct. The $560,000 is arrived by multiplying the contribution margin per unit into the number of units of special order.

Option E is incorrect. The Net income has increased by $560,000 and as such this option is incorrect.