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 current production of seats: Sale price per unit $420 ​ ​ Variable costs per unit: ​ Manufacturing $260 Marketing and administrative $40 ​ ​ Total fixed costs: ​ Manufacturing $770,000 Marketing and administrative $200,000 If a special sales order is accepted for 4000 seats at a price of $375 per unit, fixed costs remain unchanged, and no variable marketing and administrative costs will be incurred for this order, how would operating income be affected? (NOTE: Assume regular sales are not affected by the special order.)

Answer 1

Answer:

Net Profit of regular order $8030,000

Net PRofit with special order 7078,900

Explanation:

Sky High Seats

                                                    (75,000)                   (4000)

Sale price per unit                        $420 ​ ​                      $420 ​

Variable costs per unit: ​

Manufacturing                                 $260                       $375

Marketing and administrative         $40 ​ ​                          -            

Contribution Margin                        $ 120                      $ 45        

Multiplying Contribution Margin with No. of units.

Contribution Margin                      9000,000                 18900          

Total fixed costs: ​ Manufacturing $770,000                $770,000

Marketing and administrative      $200,000                $200,000

Net Profit/ (loss)                                8030,000                 ( 951,100)

We see that the Contribution Margin of the special order is much less than the contribution margin of the regular units. Also the regular units yield a net profit whereas the special order results in net loss causing the overall profit to decrease by ( 951,100) ). If the special order is accepted the new net profit will be less than the profit without accepting the special order.