Question

Belfry Company makes special equipment used in cell towers. Each unit sells for $410. Belfry produces and sells 12,700 units per year. They have provided the following income statement data: Traditional Format Contribution Format Revenue $5,207,000 Revenue $5,207,000 Cost of goods sold 2,800,000 Variable costs: Gross profit 2,407,000 Manufacturing 900,000 Selling & admin. expenses 550,000 Selling & admin. 300,000 Contribution margin 4,007,000 Fixed costs: Manufacturing 1,900,000 Selling & admin. 250,000 Operating income $1,857,000 Operating income $1,857,000 A foreign company has offered to buy 85 units for a reduced sales price of $350 per unit. The marketing manager says the sale will not affect the company's regular sales. The sales manager says that this sale will require variable selling and administrative costs. The production manager reports that it would require an additional $30,000 of fixed manufacturing costs to accommodate the specifications of the buyer. If Belfry accepts the deal, how will this impact operating income? (Round any intermediate calculations to the nearest cent, and your final answer to the nearest dollar.)
a. Operating income will decrease by $8282.
b. Operating income will increase by $8282.
c. Operating income will increase by $29,750.
d. Operating income will decrease by $21,719

Answer 1

Answer:

Operating income will decrease by $8282.

Explanation:

Expected increase in revenues (85 x 320 ) $27,200

Less: expected increase in costs

Variable manufacturing (85 x 70.87*) 6,023.95

Variable selling & administrative (85 x 31.50**) 2,677.50

Additional fixed costs 20,000 28,701.45

Expected decrease in operating revenue $1,501

*Variable manufacturing cost per unit = 900,000 / 12,700 = $70.87

**Variable selling and administrative expenses per unit = 400,000 / 12,700 = $31.50