Question

Comfort Cloud 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 current? production:

Sales price per unit $ 410

Variable costs per? unit:

Manufacturing $ 250

Marketing and administrative $ 90

Total fixed? costs:

Manufacturing $ 750,000

Marketing and administrative $ 200,000

If a special sales order is accepted for 3,000 seats at a price of $ 350 per? unit, fixed costs increase by $ 6 comma 700?, and variable marketing and administrative costs for that order are $ 4 per? unit, how would operating income be? affected? (NOTE: Assume regular sales are not affected by the special? order.)

Answer 1

75000 seats sale is not affected by the offer. Hence, accepting the offer will increase operating income provided the net income from offer is positive.

	Offer of 3000 seats
Sales revenue	[3000 seats at $ 350]	$           10,50,000.00
Variable Costs:
Manufacturing	[3000 seats x $250]	$             7,50,000.00
Marketing & administrative	[3000 seats x $4]	$                 12,000.00
Contribution margin		$             2,88,000.00
Additional Fixed Cost:
Increase in Fixed Cost		$                   6,700.00
Increase in Operating Income		$             2,81,300.00

Hence, the acceptance of Offer will lead to a $ 281,300 increase in Operating Income.