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:
Sale price per unit: $ 440

Variable costs per​ unit:
Manufacturing: $ 230
Marketing and administrative: $ 50

Total fixed​ costs:
Manufacturing: $800,000
Marketing and administrative: $220,000

If a special sales order is accepted for 7,000 seats at a price of $340 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. Increase by $ 2,380,000
B. Increase by $ 420,000
C. Decrease by $ 420,000
D. Increase by $ 6,000,000

Answer 1

Answer:

Increase by 420.000$

Explanation:

Company's annual revenue at this level is: 75.000*440 = 33.000.000$. Total variable expenses are 280*75000= 21.000.000$. Total fixed expenses are 1.020.000$ making its annual profit equal to 10.980.000$. As regular sales won't be affected with the special order, and since company does not uses its entire production capacity, we can treat fixed costs as non-reimbursable costs. Therefore, we only observe relations of variable costs and income.

With price of 340$ per unit, total income is 2.380.000$ and total variable costs are 1.960.000$. The difference is 420.000$ and relates to the increase in profit in terms of non-used total production capacity.